Regression Discontinuity and the Price Effects of Stock Market Indexing

Yen-Cheng Chang, Harrison Hong and Inessa Liskovich

The Review of Financial Studies, 2015, vol. 28, issue 1, 212-246

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.

Date: 2015
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Working Paper: Regression Discontinuity and the Price Effects of Stock Market Indexing (2013)
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