Evidence of Crowding on Russell 3000 Reconstitution Events

34 Pages Posted: 8 Jul 2020

See all articles by Alessandro Micheli

Alessandro Micheli

Imperial College London - Department of Mathematics

Eyal Neuman

Imperial College London - Department of Mathematics

Date Written: June 13, 2020

Abstract

We develop a methodology which replicates in great accuracy the FTSE Russell indexes reconstitutions, including the quarterly rebalancings due to new initial public offerings (IPOs).

While using only data available in the CRSP US Stock database for our index reconstruction, we demonstrate the accuracy of this methodology by comparing it to the original Russell US indexes for the time period between 1989 to 2019. A python package that generates the replicated indexes is also provided.

As an application, we use our index reconstruction protocol to compute the permanent and temporary price impact on the Russell 3000 annual additions and deletions, and on the quarterly additions of new IPOs . We find that the index portfolios following the Russell 3000 index and rebalanced on an annual basis are overall more crowded than those following the index on a quarterly basis. This phenomenon implies that transaction costs of indexing strategies could be significantly reduced by buying new IPOs additions in proximity to quarterly rebalance dates.

Keywords: crowding, indexing strategies, price impact, Russell Index

JEL Classification: G11

Suggested Citation

Micheli, Alessandro and Neuman, Eyal, Evidence of Crowding on Russell 3000 Reconstitution Events (June 13, 2020). Available at SSRN: https://ssrn.com/abstract=3625898 or http://dx.doi.org/10.2139/ssrn.3625898

Alessandro Micheli

Imperial College London - Department of Mathematics ( email )

South Kensington Campus
Imperial College
LONDON, SW7 2AZ
United Kingdom

Eyal Neuman (Contact Author)

Imperial College London - Department of Mathematics ( email )

South Kensington Campus
Imperial College
LONDON, SW7 2AZ
United Kingdom

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