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Regression Discontinuity and the Price Effects of Stock Market Indexing

Author

Listed:
  • Yen-Cheng Chang
  • Harrison Hong
  • Inessa Liskovich

Abstract

The Russell 1000 and 2000 stock indexes comprise the first 1000 and next 2000 largest firms ranked by market capitalization. Small changes in the capitalizations of firms ranked near 1000 move them between these indexes. Because the indexes are value-weighted, more money tracks the largest stocks in the Russell 2000 than the smallest in the Russell 1000. Using this discontinuity, we find that additions to the Russell 2000 result in price increases and deletions result in price declines. We then identify time trends in indexing effects and the types of funds that provide liquidity to indexers.

Suggested Citation

  • Yen-Cheng Chang & Harrison Hong & Inessa Liskovich, 2015. "Regression Discontinuity and the Price Effects of Stock Market Indexing," The Review of Financial Studies, Society for Financial Studies, vol. 28(1), pages 212-246.
    • Handle: RePEc:oup:rfinst:v:28:y:2015:i:1:p:212-246.
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    File URL: http://hdl.handle.net/10.1093/rfs/hhu041
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    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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