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The price effects of index additions: A new explanation

  • Liu, Shinhua

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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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
Contact details of provider: Web page: http://www.elsevier.com/locate/jeconbus

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