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The price effects of index additions: A new explanation

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  • Liu, Shinhua

Abstract

We further explore a new volatility explanation for the permanent price effect of index additions, using a sample of changes in the Nikkei 225. Additions to the index elicit significant price hikes, which tend to be permanent despite temporary price reversals. Meanwhile, investor awareness and demand increase, while price volatility decreases for the added stocks, contrary to the higher price volatility for stocks added to the S&P 500. Moreover, multivariate regression analysis demonstrates that the lower volatility contributes significantly to the permanent price boost, a new explanation; so does the higher investor awareness, consistent with the prior literature.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Economics and Business.

Volume (Year): 63 (2011)
Issue (Month): 2 (March)
Pages: 152-165

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Handle: RePEc:eee:jebusi:v:63:y::i:2:p:152-165

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Web page: http://www.elsevier.com/locate/jeconbus

Related research

Keywords: Nikkei 225 Additions Price effects Explanations Price volatility;

References

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  1. French, Kenneth R. & Schwert, G. William & Stambaugh, Robert F., 1987. "Expected stock returns and volatility," Journal of Financial Economics, Elsevier, vol. 19(1), pages 3-29, September.
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  3. Jones, Charles M & Seguin, Paul J, 1997. "Transaction Costs and Price Volatility: Evidence from Commission Deregulation," American Economic Review, American Economic Association, vol. 87(4), pages 728-37, September.
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  9. Liu, Shinhua, 2006. "The impacts of index rebalancing and their implications: Some new evidence from Japan," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 16(3), pages 246-269, July.
  10. Shinhua Liu, 2000. "Changes in the Nikkei 500: New Evidence for Downward Sloping Demand Curves for Stocks," International Review of Finance, International Review of Finance Ltd., vol. 1(4), pages 245-267.
  11. Merton, Robert C., 1987. "A simple model of capital market equilibrium with incomplete information," Working papers 1869-87., Massachusetts Institute of Technology (MIT), Sloan School of Management.
  12. Amihud, Yakov & Mendelson, Haim, 1986. "Asset pricing and the bid-ask spread," Journal of Financial Economics, Elsevier, vol. 17(2), pages 223-249, December.
  13. Brown, Stephen J. & Warner, Jerold B., 1980. "Measuring security price performance," Journal of Financial Economics, Elsevier, vol. 8(3), pages 205-258, September.
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Cited by:
  1. Azevedo, Alcino & Karim, Mohamad & Gregoriou, Andros & Rhodes, Mark, 2014. "Stock price and volume effects associated with changes in the composition of the FTSE Bursa Malaysian KLCI," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 28(C), pages 20-35.

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