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Additions to Market Indices and the Comovement of Stock Returns Around the World

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  • Yishay Yafeh
  • Stijn Claessens

Abstract

Using newly-constructed data covering the last decade, we document that, in most of forty markets, when added to the main index, firms’ returns experience an increase in comovement with the rest of the index, reflected in higher beta and greater explanatory power of the market return. Stock turnover and analyst coverage also typically increase upon inclusion. Using various tests, we find the demand-based view of comovement (the category/habitat theories of Barberis, Shleifer and Wurgler, 2005) to provide a good explanation for many of our findings. Some results, though, suggest that information-related factors are also important in explaining the increased comovement.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 11/47.

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Length: 34
Date of creation: 01 Mar 2011
Date of revision:
Handle: RePEc:imf:imfwpa:11/47

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Keywords: Stock markets; Stock prices; investors; institutional investors; stock market; stock price; financial economics; stock market indices; stock returns; investment strategies; financial systems; shares outstanding; mutual funds; equity markets; stock market index; financial markets; financial system; stock indices; equity market; nasdaq; stock exchange; international financial markets; stock exchanges; rates of return; stock exchange index; financial institutions; stock trading; investment decisions; common law tradition; bond; total market capitalization; financial intermediation;

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  1. Rafael LaPorta & Florencio Lopez-de-Silanes & Andrei Shleifer, . "What Works in Securities Laws?," Working Paper 19491, Harvard University OpenScholar.
  2. Bank for International Settlements, 2007. "Institutional investors, global savings and asset allocation," CGFS Papers, Bank for International Settlements, number 27, January.
  3. Nicholas Barberis & Andrei Shleifer, 2000. "Style Investing," NBER Working Papers 8039, National Bureau of Economic Research, Inc.
  4. Bhattacharya, Utpal & Galpin, Neal, 2011. "The Global Rise of the Value-Weighted Portfolio," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 46(03), pages 737-756, June.
  5. Shleifer, Andrei, 1986. " Do Demand Curves for Stocks Slope Down?," Journal of Finance, American Finance Association, vol. 41(3), pages 579-90, July.
  6. Randall Morck & Bernard Yeung & Wayne Wu, 1999. "The Information Content of Stock Markets: Why do Emerging Markets have Synchronous Stock Price Movements?," William Davidson Institute Working Papers Series 44, William Davidson Institute at the University of Michigan.
  7. Ferreira, Miguel A. & Matos, Pedro, 2008. "The colors of investors' money: The role of institutional investors around the world," Journal of Financial Economics, Elsevier, vol. 88(3), pages 499-533, June.
  8. Jin, Li & Myers, Stewart C., 2006. "R2 around the world: New theory and new tests," Journal of Financial Economics, Elsevier, vol. 79(2), pages 257-292, February.
  9. Aditya Kaul & Vikas Mehrotra & Randall Morck, 2000. "Demand Curves for Stocks "Do "Slope Down: New Evidence from an Index Weights Adjustment," Journal of Finance, American Finance Association, vol. 55(2), pages 893-912, 04.
  10. De Nicolò, Gianni & Laeven, Luc & Ueda, Kenichi, 2008. "Corporate governance quality: Trends and real effects," Journal of Financial Intermediation, Elsevier, vol. 17(2), pages 198-228, April.
  11. Jerry Coakley & Periklis Kougoulis, 2004. "Comovement and FTSE 100 Index Changes," Money Macro and Finance (MMF) Research Group Conference 2004 11, Money Macro and Finance Research Group.
  12. Bryan Mase, 2008. "Comovement in the FTSE 100 Index," Applied Financial Economics Letters, Taylor and Francis Journals, vol. 4(1), pages 9-12.
  13. Harford, Jarrad & Kaul, Aditya, 2005. "Correlated Order Flow: Pervasiveness, Sources, and Pricing Effects," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 40(01), pages 29-55, March.
  14. Aggarwal, Reena & Klapper, Leora & Wysocki, Peter D., 2005. "Portfolio preferences of foreign institutional investors," Journal of Banking & Finance, Elsevier, vol. 29(12), pages 2919-2946, December.
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