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Additions to Market Indices and the Comovement of Stock Returns Around the World

Author/Editor: Yishay Yafeh | Stijn Claessens
Authorized for Distribution: March 1, 2011
Electronic Access: Free Full Text (PDF file size is 967KB)
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Disclaimer: This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate.

Summary: Using newly-constructed data covering the last decade, we document that, in most of forty markets, when added to the main index, firms’ returns experience an increase in comovement with the rest of the index, reflected in higher beta and greater explanatory power of the market return. Stock turnover and analyst coverage also typically increase upon inclusion. Using various tests, we find the demand-based view of comovement (the category/habitat theories of Barberis, Shleifer and Wurgler, 2005) to provide a good explanation for many of our findings. Some results, though, suggest that information-related factors are also important in explaining the increased comovement.
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Series: Working Paper No. 11/47
Subject(s): Stock markets | Stock prices
Author's keyword(s): Index inclusion; stock price comovements; category | habitat and information theories; index-based investment
    Published:   March 1, 2011        
    ISBN/ISSN:   9781455218950/1018-5941   Format:   Paper
    Stock No:   WPIEA2011047   Pages:   34
    Price:   US$18.00
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