Comovement after Joining an Index: Spillovers of Nonfundamental Effects
49 Pages Posted: 17 Jun 2004
Date Written: June 5, 2006
This study considers the case of two overlapping categories in the context of recent category models. Specifically, we examine whether investor sentiment and market frictions specific to one category can affect the returns on assets belonging to the other category. With recent additions of several real estate investment trusts (REITs) into general stock market indices as a natural experiment, we find support for spillovers of such nonfundamental effects, as evidenced by the increased return correlation between REITs that remain outside the index and the index stocks. Further analysis reveals that market frictions play a greater role than investor sentiment.
Keywords: category model, spillover effect, REITs, stock market index
JEL Classification: G11, G12
Suggested Citation: Suggested Citation