Is There Really Excess Comovement? Causal Evidence from FTSE 100 Index Turnover

50 Pages Posted: 26 Apr 2014 Last revised: 9 Dec 2014

See all articles by Christian von Drathen

Christian von Drathen

University of Texas at Dallas - Naveen Jindal School of Management

Date Written: November 2014

Abstract

Stock returns appear to comove in excess of common news about stock fundamentals. I examine comovement when stocks are added to or deleted from the FTSE 100 stock index, which are events without news about fundamantals. Using a natural experiment created by FTSE’s index balancing rule, I find that random index turnover has no significant effect on comovement. Furthermore, non-random index turnover can introduce a selection bias that overstates the effect on comovement. Index turnover does not cause a change in comovement, but much rather it seems to be the reverse: a change in comovement can cause index turnover. My findings are consistent with the fundamentals-based hypothesis; rejections in the previous literature may be due to non-random index turnover.

Keywords: Comovement, index turnover, market frictions, limits to arbitrage

JEL Classification: G10, G14, G15

Suggested Citation

von Drathen, Christian, Is There Really Excess Comovement? Causal Evidence from FTSE 100 Index Turnover (November 2014). Available at SSRN: https://ssrn.com/abstract=2429222 or http://dx.doi.org/10.2139/ssrn.2429222

Christian Von Drathen (Contact Author)

University of Texas at Dallas - Naveen Jindal School of Management ( email )

P.O. Box 830688
Richardson, TX 75083-0688
United States

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