Regression Discontinuity and the Price Effects of Stock Market Indexing

54 Pages Posted: 10 Aug 2013

See all articles by Yen-Cheng Chang

Yen-Cheng Chang

National Taiwan University - College of Management; National Taiwan University - Center for Research in Econometric Theory and Applications

Harrison G. Hong

Columbia University, Graduate School of Arts and Sciences, Department of Economics; National Bureau of Economic Research (NBER)

Inessa Liskovich

University of Texas at Austin - Department of Finance

Multiple version iconThere are 3 versions of this paper

Date Written: August 2013

Abstract

Studies find price increases for additions to the S&P 500 index but no decreases for deletions. Additions come with good earnings news, suggesting these studies are not just measuring an indexing effect. We develop a regression discontinuity design using Russell Indices for cleaner identification. Stocks are assigned to indices based on their end-of-May market capitalizations. Stocks ranked just below 1000 are in the Russell 2000. The indices are value-weighted so these stocks receive index buying whereas those just above 1000 have close to none. Using this random assignment, we find price effects for both additions and deletions.

Suggested Citation

Chang, Yen-Cheng and Hong, Harrison G. and Liskovich, Inessa, Regression Discontinuity and the Price Effects of Stock Market Indexing (August 2013). NBER Working Paper No. w19290. Available at SSRN: https://ssrn.com/abstract=2308259

Yen-Cheng Chang (Contact Author)

National Taiwan University - College of Management ( email )

Department and Graduate Institute of Finance
College of Management
Taipei 106
Taiwan

National Taiwan University - Center for Research in Econometric Theory and Applications ( email )

1 Sec. 4, Roosevelt Road
Taipei 106, 106
Taiwan

Harrison G. Hong

Columbia University, Graduate School of Arts and Sciences, Department of Economics ( email )

420 W. 118th Street
New York, NY 10027
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Inessa Liskovich

University of Texas at Austin - Department of Finance ( email )

Red McCombs School of Business
Austin, TX 78712
United States

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