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Price distortion induced by a flawed stock market index

Author

Listed:
  • Kotaro Miwa

    (Tokio Marine Asset Management Co., Ltd)

  • Kazuhiro Ueda

    (The University of Tokyo)

Abstract

Despite the introduction of sophisticated stock market indices, investors often trade portfolios of the flawed indices to change their exposure to the market. In this study, we show that these transactions cause significant mispricing in individual stocks, especially during periods of significant market movement. As an influential, albeit flawed, stock index, we focus on the Nikkei 225. We find index constituents that are excessively weighted on the index, experience buying (selling) pressure when the stock market surges (falls), and experience price corrections after such periods of change. In contrast, non-constituent stocks do not experience such trading pressure.

Suggested Citation

  • Kotaro Miwa & Kazuhiro Ueda, 2016. "Price distortion induced by a flawed stock market index," Financial Markets and Portfolio Management, Springer;Swiss Society for Financial Market Research, vol. 30(2), pages 137-160, May.
    • Handle: RePEc:kap:fmktpm:v:30:y:2016:i:2:d:10.1007_s11408-016-0269-5
    DOI: 10.1007/s11408-016-0269-5
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    References listed on IDEAS

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    Cited by:

    1. Kotaro Miwa, 2019. "Stock Futures of a Flawed Market Index," Asia-Pacific Financial Markets, Springer;Japanese Association of Financial Economics and Engineering, vol. 26(1), pages 1-21, March.

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    More about this item

    Keywords

    Stock market index; Price-weighted index; Trading pressure; Stock mispricing;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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