Rules and Regression Discontinuities in Asset Markets

46 Pages Posted: 29 Aug 2011 Last revised: 13 Aug 2013

See all articles by Yen-Cheng Chang

Yen-Cheng Chang

National Taiwan University - Department of Finance; National Taiwan University - Center for Research in Econometric Theory and Applications

Harrison G. Hong

Columbia University, Graduate School of Arts and Sciences, Department of Economics; National Bureau of Economic Research (NBER)

Multiple version iconThere are 3 versions of this paper

Date Written: August 27, 2012

Abstract

We show that institutional portfolio rules induce regression discontinuity experiments in stock markets using the Russell indices. Stocks are ranked each May 31st based on their market capitalization. Those ranked above the 1000 cut-off are in the Russell 1000. Those below the 1000 cut-off and above the 3000 cut-off are in the Russell 2000. Indices are value-weighted. Small stocks just below the 1000 cut-off are heavily weighted in Russell 2000 and receive more forced buying than large ones just above the cut-off that have little weight in Russell 1000. Just-included stocks have discontinuously higher returns in June compared to just-excluded ones, followed by return reversal in July. Just-included stocks discontinuously co-vary more with the market subsequent to index inclusion. There is also a discontinuity around the 3000 cut-off.

NOTE: This is an old draft. The new draft "Regression Discontinuity and the Price Effects of Stock Market Indexing" can be found at: http://ssrn.com/abstract=2288184

Keywords: portfolio rules, regression discontinuity, index inclusion

JEL Classification: G11, G12, G14, G2

Suggested Citation

Chang, Yen-Cheng and Hong, Harrison G., Rules and Regression Discontinuities in Asset Markets (August 27, 2012). Available at SSRN: https://ssrn.com/abstract=1918594 or http://dx.doi.org/10.2139/ssrn.1918594

Yen-Cheng Chang

National Taiwan University - Department of Finance ( email )

1, Sec. 4, Roosevelt Road
Taipei, 106
Taiwan

National Taiwan University - Center for Research in Econometric Theory and Applications ( email )

1, Sec. 4, Roosevelt Road
Taipei, 106
Taiwan

Harrison G. Hong (Contact Author)

Columbia University, Graduate School of Arts and Sciences, Department of Economics ( email )

420 W. 118th Street
New York, NY 10027
United States

National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
United States

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