Russell Reconstitution Effect Revisited

28 Pages Posted: 6 Feb 2007

See all articles by Zhan M. Onayev

Zhan M. Onayev

Passport Capital Management

Volodymyr M. Zdorovtsov

Acadian Asset Management LLC

Date Written: February 1, 2007

Abstract

We argue that the recent changes in reconstitution procedures introduced by the Frank Russell Company to ease the migration of affected constituents into and out of index-tracking portfolios, as well as continued growth in the size of speculative capital devoted to the event merit another study of the Russell reconstitution effects. We build upon Madhavan (2003) and conduct a more direct test of the role of order flow imbalances and liquidity changes on returns of Russell 3000 additions and deletions. Our results support both price pressure and index membership hypotheses. While index deletions are heavily sold far ahead of, during, and long after the event, the trading of additions is focused close to the event date. We find that the Russell reconstitution effect weakens during the more recent years. Price pressure-induced reversal effects are found to be much smaller to nonexistent in the recent years.

Keywords: Index Reconstitution, Order Flow, Liquidity

JEL Classification: G12, G14, G19

Suggested Citation

Onayev, Zhan M. and Zdorovtsov, Volodymyr M., Russell Reconstitution Effect Revisited (February 1, 2007). Available at SSRN: https://ssrn.com/abstract=960727 or http://dx.doi.org/10.2139/ssrn.960727

Zhan M. Onayev

Passport Capital Management ( email )

30 Hotaling Place
San Francisco, CA
United States
415-525-8916 (Phone)

Volodymyr M. Zdorovtsov (Contact Author)

Acadian Asset Management LLC ( email )

260 Franklin Street
Boston, MA 02110
United States

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