Indexing and Stock Market Serial Dependence Around the World

49 Pages Posted: 30 May 2016 Last revised: 5 Oct 2017

See all articles by Guido Baltussen

Guido Baltussen

Erasmus University Rotterdam (EUR); Robeco Asset Management - Quantitative Investing

Sjoerd van Bekkum

Erasmus University

Zhi Da

University of Notre Dame - Mendoza College of Business

Date Written: August 16, 2017

Abstract

We document a striking change in index return serial dependence across 20 major market indexes covering 15 countries in North America, Europe, and Asia. While many studies found serial dependence to be positive until the 1990s, it switches to negative since the 2000s. This change happens in most stock markets around the world and is both statistically significant and economically meaningful. Further tests reveal that the decline in serial dependence links to the increasing popularity of index products (e.g., futures, ETFs, and index mutual funds). The link between serial dependence and indexing is not driven by a time trend, holds up in the cross-section of stock indexes, is confirmed by tests exploiting Nikkei 225 index weights and S&P 500 membership, and in part reflects the arbitrage mechanism between index products and the underlying stocks.

Keywords: Return autocorrelation, Stock market indexing, Arbitrage

JEL Classification: G12, G14, G15

Suggested Citation

Baltussen, Guido and van Bekkum, Sjoerd and Da, Zhi, Indexing and Stock Market Serial Dependence Around the World (August 16, 2017). Journal of Financial Economics (JFE), Forthcoming. Available at SSRN: https://ssrn.com/abstract=2786516 or http://dx.doi.org/10.2139/ssrn.2786516

Guido Baltussen

Erasmus University Rotterdam (EUR) ( email )

Burgemeester Oudlaan 50
3000 DR Rotterdam, Zuid-Holland 3062PA
Netherlands

Robeco Asset Management - Quantitative Investing ( email )

Rotterdam, 3011 AG
Netherlands

Sjoerd Van Bekkum (Contact Author)

Erasmus University ( email )

P.O. Box 1738
Rotterdam, NL 3062 PA
Netherlands

Zhi Da

University of Notre Dame - Mendoza College of Business ( email )

Notre Dame, IN 46556-5646
United States

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