The Impact of the Introduction of Index Securities on the Underlying Stocks: The Case of the Diamonds and the Dow 30

Bonnie F. Van Ness, Robert A. Van Ness and Richard S. Warr
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Bonnie F. Van Ness: University of Mississippi, Department of Finance, School of Business Administration, P.O. Box 1848, University, MS 38677, USA
Robert A. Van Ness: University of Mississippi, Department of Finance, School of Business Administration, P.O. Box 1848, University, MS 38677, USA
Richard S. Warr: Department of Business Management, College of Management, Box 7229, North Carolina State University, Raleigh, NC 27695-7229, USA

Chapter 7 in Advances in Quantitative Analysis of Finance and Accounting:New Series, 2005, pp 105-128 from World Scientific Publishing Co. Pte. Ltd.

Abstract: AbstractWe test the hypothesis that uniformed traders prefer to invest in a basket of stocks rather than a portfolio of individual stocks by examining the impact of the introduction of the Diamond Index securities on the underlying Dow 30 stocks. We find that following the introduction, the bid-ask spreads of the Dow 30 increase relative to spreads of matching stocks. However, we do not find a consistent change in the adverse selection components of the Dow stocks relative to the matching sample. Our overall results are consistent with either a movement of uninformed traders to the Diamonds or the increase of another component of the spread, such as inventory holding costs.

Keywords: Derivatives Pricing; Path Analysis; Spillover; Effective Interest Rate; Higher Moments; NASDAQ; Covered Call Investing; Index Securities; Hedging; Asset Pricing; CFA Designation (search for similar items in EconPapers)
Date: 2005
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Citations: View citations in EconPapers (4)

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