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The Impact of the Introduction of Index Securities on the Underlying Stocks: The Case of the Diamonds and the Dow 30

In: Advances In Quantitative Analysis Of Finance And Accounting New Series

Author

Listed:
  • Bonnie F. Van Ness

    (University of Mississippi, Department of Finance, School of Business Administration, P.O. Box 1848, University, MS 38677, USA)

  • Robert A. Van Ness

    (University of Mississippi, Department of Finance, School of Business Administration, P.O. Box 1848, University, MS 38677, USA)

  • Richard S. Warr

    (Department of Business Management, College of Management, Box 7229, North Carolina State University, Raleigh, NC 27695-7229, USA)

Abstract

We test the hypothesis that uniformed traders prefer to invest in a basket of stocks rather than a portfolio of individual stocks by examining the impact of the introduction of the Diamond Index securities on the underlying Dow 30 stocks. We find that following the introduction, the bid-ask spreads of the Dow 30 increase relative to spreads of matching stocks. However, we do not find a consistent change in the adverse selection components of the Dow stocks relative to the matching sample. Our overall results are consistent with either a movement of uninformed traders to the Diamonds or the increase of another component of the spread, such as inventory holding costs.

Suggested Citation

  • Bonnie F. Van Ness & Robert A. Van Ness & Richard S. Warr, 2005. "The Impact of the Introduction of Index Securities on the Underlying Stocks: The Case of the Diamonds and the Dow 30," World Scientific Book Chapters, in: Cheng-Few Lee (ed.), Advances In Quantitative Analysis Of Finance And Accounting New Series, chapter 7, pages 105-128, World Scientific Publishing Co. Pte. Ltd..
    • Handle: RePEc:wsi:wschap:9789812701213_0007
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    Citations

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    Cited by:

    1. De Winne, Rudy & Gresse, Carole & Platten, Isabelle, 2014. "Liquidity and risk sharing benefits from opening an ETF market with liquidity providers: Evidence from the CAC 40 index," International Review of Financial Analysis, Elsevier, vol. 34(C), pages 31-43.
    2. Laurent Deville, 2008. "Exchange Traded Funds: History, Trading and Research," Post-Print halshs-00162223, HAL.
    3. repec:dau:papers:123456789/2742 is not listed on IDEAS
    4. Prabhdeep Kaur & Jaspal Singh, 2021. "Impact of ETF Listing on the Returns Generated by Underlying Stocks: Indian Evidence," Management and Labour Studies, XLRI Jamshedpur, School of Business Management & Human Resources, vol. 46(3), pages 263-288, August.

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