Working Paper: NBER ID: w19290
Authors: Yencheng Chang; Harrison Hong; Inessa Liskovich
Abstract: Studies find price increases for additions to the S&P 500 index but no decreases for deletions. Additions come with good earnings news, suggesting these studies are not just measuring an indexing effect. We develop a regression discontinuity design using Russell Indices for cleaner identification. Stocks are assigned to indices based on their end-of-May market capitalizations. Stocks ranked just below 1000 are in the Russell 2000. The indices are value-weighted so these stocks receive index buying whereas those just above 1000 have close to none. Using this random assignment, we find price effects for both additions and deletions.
Keywords: Stock Market Indexing; Regression Discontinuity; Price Effects
JEL Codes: G02; G12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Stocks added to the Russell 2000 (G19) | Price increase in June (E30) |
| Stocks deleted from the Russell 2000 (G12) | Price decrease (D49) |
| Forced buying by index funds (G23) | Price increase in June (E30) |
| Index membership crossing (C43) | Price effects due to forced buying (D41) |