Additions to Market Indices and the Comovement of Stock Returns Around the World (original) (raw)

Comovement of Newly Added Stocks with National Market Indices: Evidence from Around the World

SSRN Electronic Journal, 2000

We document the prevalence around the world of increased stock price comovement experienced by companies when added to major indices, and shed new light on the causes of this phenomenon. Using newly-constructed and extensive data covering forty developed and emerging markets over the last decade, we document that in most, though not all, countries, when added to a major index, a firm's return experiences a postinclusion increase in comovement with the rest of the index, reflected in both a higher beta (especially if the pre-inclusion beta is less than one) and greater explanatory power of the market return (higher R 2 ). Stock turnover and analyst coverage also typically increase upon inclusion. Using a variety of empirical tests, we find that the demand-based view of comovement (the category/habitat views of Barberis, Shleifer and Wurgler, 2005) provides a good explanation for many of our findings. Some results, though, suggest that information-related factors are also important.

Index Changes in Emerging Markets

In this paper, we study the returns of emerging market stocks that are included in and excluded from the MSCI Emerging Markets index, a widely used benchmark for investment funds. Our sample consists of 269 stocks from 24 countries that were added to the index and 262 stocks that were deleted. We find convincing evidence of positive (negative) permanent (temporary) price impacts upon index inclusion (exclusion). We attribute this to the radar screen effect (Merton, 1987), which predicts that more visible stocks attract more (distant) investors and hence require lower expected returns. Consistent with this theory, in the long-run we find that betas with respect to the world index increase, while those of the local indices decrease. When we analyse returns over a short-run event window from before announcement to after inclusion, we find evidence of a pronounced short term drift which persists after the inclusion date. We attribute this short term phenomenon to limited arbitrage on the predictable portfolio rebalancing behavior of tracker funds. 1 Studies that focus on deletions include Harris and Gurel (1986), , Beneish and Whaley (2002). The evidence is yet unclear as deletions are noisier events by nature.

The index cohesive effect on stock market correlations

European Physical Journal B, 2009

We present empirical examination and reassessment of the functional role of the market Index, using datasets of stock returns for eight years, by analyzing and comparing the results for two very different markets: 1) the New York Stock Exchange (NYSE), representing a large, mature market, and 2) the Tel Aviv Stock Exchange (TASE), representing a small, young market. Our method includes special collective (holographic) analysis of stock-Index correlations, of nested stock correlations (including the Index as an additional ghost stock) and of bare stock correlations (after subtraction of the Index return from the stocks returns). Our findings verify and strongly substantiate the assumed functional role of the index in the financial system as a cohesive force between stocks, i.e., the correlations between stocks are largely due to the strong correlation between each stock and the Index (the adhesive effect), rather than interstock dependencies. The Index adhesive and cohesive effects on the market correlations in the two markets are presented and compared in a reduced 3-D principal component space of the correlation matrices (holographic presentation). The results provide new insights into the interplay between an index and its constituent stocks in TASE-like versus NYSE-like markets.

Are Stock Markets Interdependent? An Empirical Study of Selected Market Indices

2016

It has been acclaimed by various researchers that international diversification has reduced its charm as return-risk of the world markets are highly correlated due to information spillover effect and globalization. This study examines inter linkages and interactions, if any, among the selected twelve indices of developed and emerging economies. The study applies descriptive statistics, correlation coefficients and Granger Causality test to check basic characteristics of each indices and their correlation and impact on each other. Granger Causality test for some indices shows that return of one market index had causal influence on return in other market index. The finding of this paper gives good insights to the international investors who are looking to reduce risk for a given level of return.

Information Content of S&P 500 Index Additions: A Reexamination Using Russell 1000 Reconstitutions

SSRN Electronic Journal, 2000

Existing literature on the announcement effects of S&P 500 index additions generally supports the hypothesis that demand curves for stocks slope downward. This explanation assumes that index addition announcements are free of any information content. More recent evidence, however, indicates that index additions are not completely free of information. Examining Russell 1000 reconstitutions, which are based on transparent and objective rules, and comparing them with S&P 500 additions, which are made by S&P index committee, enables us to unravel the two explanations. We uncover two interesting findings. First, we show that it is important to control for prior performance before examining financial analysts' forecasting behavior. Second, after controlling for prior performance and other characteristics that are known to influence index inclusion, we find that analysts revise their earnings expectations upwards for S&P 500 index additions and not for Russell 1000 reconstitutions. Moreover, we find strong evidence that S&P 500 firms exhibit a permanent upward shift in stock price in the two years following index additions. In contrast, Russell 1000 firms witness complete reversal of stock returns following reconstitutions compared to size and book-to-market matched control firms. These results are consistent with S&P 500 index additions conveying new information to the market.

Is Stock Price Indices Interdependence? Evidence from the Kuala Lumpur Stock Exchange

papers.ssrn.com

This paper discusses some of the issues related to the construction and interpretation of stock price indices most widely used in the Kuala Lumpur Stock Exchange: the Composite index, the EMAS index, the Second Board index and the Industrial index. Each of the indices represents a benchmark portfolio for a different segment of the stock market. The study also compares the movements of the indices over the period between 1995 through 2000. The results show that the indices are highly integrated in all cases. There is no obvious indication of large size market capitalisation of indices particularly the Composite index leads other indices. The results suggest each index contain similar information content regardless of their size.

Excess Stock Return Comovements and the Role of Investor Sentiment

SSRN Electronic Journal, 2000

There is an established literature suggesting that correlations between international equity markets is increasing. In this paper, we examine this increase in comovement and investigate the sources of this comovement. Our analysis shows that correlations between international equity indeed have been growing. However, decomposing returns into a fundamental and non-fundamental part reveals that the increase in correlation is driven by the non-fundamental part. Further analysis shows that the comovement of returns is driven by investor sentiment (American Association of Individual Investors index) and this sentiment only explains the comovement of the non-fundamental part of returns. Our findings provide evidence for behavioral explanations of comovement, such as categorization and habitat formation (see , Journal of Finance). JEL Codes: C32; G15.

Comovement After Joining an Index: Spillovers of Nonfundamental Effects

Real Estate Economics, 2007

This study considers the case of two overlapping categories in the context of recent category models. Specifically, we examine whether investor sentiment and market frictions specific to one category can affect the returns on assets belonging to the other category. With recent additions of several real estate investment trusts (REITs) into general stock market indices as a natural experiment, we find support for spillovers of such nonfundamental effects, as evidenced by the increased return correlation between REITs that remain outside the index and the index stocks. Further analysis reveals that market frictions play a greater role than investor sentiment.

Stockmarket comovements revisited

2005

We revisit the issue of comovements of emerging and developed stockmarkets, and provide a simultaneous treatment of data for the eighties and nineties. We show that while emerging markets experience greater instability in the long term than their developed counterparts, there is room for short−term strategies to take advantage of profit opportunities in the emerging markets, especially in India.