Russell index reconstitutions and short interest

Aigbe Akhigbe, Anna D. Martin, Melinda Newman and Andre de Souza

The Quarterly Review of Economics and Finance, 2022, vol. 84, issue C, 577-588

Abstract: Our purpose is to extend the reconstitution literature by considering short interest activity and shareholder wealth effects around the rebalancing of the Russell 2000 index. For index additions, we find an inverse relationship in the reconstitution period, suggesting a dominant price pressure effect, and a direct relationship post-reconstitution, suggesting that short interest liquidity benefits dominate. For index deletions, our evidence suggests there are permanent negative wealth effects and persistent increases in short interest surrounding index reconstitutions, consistent with the imperfect substitutes hypothesis. Overall, our results show that short interest is an influential factor in the wealth effects of Russell 2000 index reconstitutions.

Keywords: Index reconstitution; Short interest; Wealth effects (search for similar items in EconPapers)
JEL-codes: G11 G14 (search for similar items in EconPapers)
Date: 2022
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Persistent link: https://EconPapers.repec.org/RePEc:eee:quaeco:v:84:y:2022:i:c:p:577-588

DOI: 10.1016/j.qref.2020.10.009

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