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Regression Discontinuity and the Price Effects of Stock Market Indexing

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  • Yen-cheng Chang
  • Harrison Hong
  • Inessa Liskovich

Abstract

Studies find price increases for additions to the S&P 500 index but no decreases for deletions. Additions come with good earnings news, suggesting these studies are not just measuring an indexing effect. We develop a regression discontinuity design using Russell Indices for cleaner identification. Stocks are assigned to indices based on their end-of-May market capitalizations. Stocks ranked just below 1000 are in the Russell 2000. The indices are value-weighted so these stocks receive index buying whereas those just above 1000 have close to none. Using this random assignment, we find price effects for both additions and deletions.

Suggested Citation

  • Yen-cheng Chang & Harrison Hong & Inessa Liskovich, 2013. "Regression Discontinuity and the Price Effects of Stock Market Indexing," NBER Working Papers 19290, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:19290
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    References listed on IDEAS

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    More about this item

    JEL classification:

    • G02 - Financial Economics - - General - - - Behavioral Finance: Underlying Principles
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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