Changes in trading volume and return volatility associated with S&amp;P 500 index additions and deletions

Lin, Eric S.

doi:10.1108/s0196-3821(2010)0000026009

Cited by 3 publications

(8 citation statements)

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“…This abnormal return might be driven by changes in liquidity (Erwin and Miller, 1998), volatility (Lin, 2007), changes information asymmetries and information uncertainty (Denis et. al, 2003), or transaction costs (Hedge and McDermott, 2003 Since limits of arbitrage are expected to be lower for S&P 500 members relative to non-S&P 500 stocks, then arbitrageurs are expected to be able to reduce mispricing and bring prices closer to fair value.…”

Section: Index Membership and Stock Mispricing Hypothesesmentioning

confidence: 99%

“…Hedge and McDermott, 2003;Chen et. al, 2004;Vijh, 1994;Lin, 2007;Erwin and Miller, 1998; and others). Therefore, S&P 500 stocks provide excellent conditions to examine the effect of the limits of arbitrage on the arbitrage process to eliminate stock mispricing.…”

mentioning

confidence: 93%

“…Recall that previous studies suggest that the S&P inclusion effect is associated with changes in several characteristics such as: liquidity (Erwin and Miller, 1998), information asymmetries (Denis et al, 2003), volatility (Lin, 2007), and transaction costs (Hedge and McDermott, 2003).…”

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confidence: 99%

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The Limits of Arbitrage and Stock Mispricing: Evidence from Decomposing the Market to Book Ratio

Alshammasi

2015

SSRN Journal

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The purpose of this paper is to investigate the effect of the "limits of arbitrage" on securities mispricing. Specifically, I investigate the effect of the availability of substitutes and financial constraints on stock mispricing. . In addition, this study investigates the difference in the limits of arbitrage between stocks that are included in the Standard & Poor's 500 index (S&P 500 hereafter) and non-S&P 500 stocks. I expect S&P 500 stocks to have, on average, lower levels of the limits of arbitrage, in the sense that it will lead to lower mispricing for these stocks, relative to non-S&P 500 stocks. I also examine if the lower mispricing can be attributed to their lower limits of arbitrage.Modern finance theory and efficient market hypothesis suggest that security prices, at equilibrium, should reflect their fundamental value. If the market price deviates from the intrinsic value, then a risk-free profit opportunity has emerged and arbitrageurs will eliminate mispricing and equilibrium is restored. This arbitrage process is characterized by large number of arbitrageurs which have infinite access to capital. However, a better description of reality is that there are few numbers of arbitrageurs to the extent that they are highly specialized; and they have limited access to capital. Under these condition arbitrage is no more a risk-free activity and can be limited by several factors such as arbitrage risk and transaction costs.Other factors that are discussed in the literature are availability of substitutes and financial constraints. The former arises as a result of the specialization of arbitrageurs in the market in which they operate, while the latter arises as a result of the separation between arbitrageurs and capital.In this dissertation, I develop a measure of the availability of substitutes that is based on the propensity scores obtained from propensity score matching technique. In addition, I use the absolute value of skewness of returns as a proxy of financial constraints.Previous studies used the limits of arbitrage framework to explain pricing puzzles such as the closed-end fund discounts. However, closed-end fund discounts are highly affected by uncertainty of managerial ability and agency problems. This study overcomes this problem by studying the effect of limits of arbitrage on publicly traded securities. The results show that there is a significant relationship between proxies of limits of arbitrage and firm specific mispricing.More importantly, empirical results indicate that stocks that have no close substitutes have higher mispricing. In addition, stocks that have high skewness show higher mispricing.Subsequent studies show that the S&P 500 stocks have different levels of liquidity, analysts' coverage and volatility. These characteristics affect the ability of arbitrageurs to eliminate mispricing. Preliminary univariate tests show that S&P 500 stocks have, on average, lower mispricing and limits of arbitrage relative to non-S&P 500 stocks. In addition, the multivariate test shows that S&P 50...

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Section: Index Membership and Stock Mispricing Hypothesesmentioning

confidence: 99%

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confidence: 93%

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The Limits of Arbitrage and Stock Mispricing: Evidence from Decomposing the Market to Book Ratio

Alshammasi

2015

SSRN Journal

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“…This evaluation may differ from indicator to indicator based on the data; therefore, the results may differ in terms whether or not products are accepted for trading in the Islamic market (Hashim, 2008). Meanwhile, many researchers, such as Mezghani and Boujelbène (2018) and Lin and Kensinger (2007), have shown that Islamic products and services are affected by consistent standards in Islamic law and that standardization is not easy due to the presence of different product brands.…”

Section: Introductionmentioning

confidence: 99%

“…Ensuring continued growth using Islamic indicators requires countries to provide investment alternatives that are compatible with innovations from major global financial centers (Lin & Kensinger, 2007). The Islamic capital markets continue to expand and achieve increasingly attractive and remarkable growth; this has encouraged financial intermediaries to provide services and products.…”

Section: Introductionmentioning

confidence: 99%

Portfolio Returns of Islamic Indices and Stock Prices in GCC Countries: Empirical Evidence From the ARDL Model

Alshubiri

2021

Sage Open

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This study aimed to analyze four portfolio returns of Islamic indices to determine the potential of attracting investments in the Islamic Stock Price Index of the six Gulf Cooperation Council (GCC) countries. Monthly data were collected from S&P Dow Jones Indices LLC reports covering the period from December 31, 2010 to December 31, 2019. The study applied the autoregressive distributed lag (ARDL) method for estimation. The findings show that the S&P GCC Composite Shariah, the S&P GCC Composite Shariah Dividend, and the S&P Shariah Domestic Total Return Index are positively related in the long run to the Islamic Stock Price Index but S&P GCC Investable Shariah is negatively related to the Islamic Stock Price Index. The error correction model (ECM) results for the short-run ARDL model indicate that the S&P GCC Composite Shariah and the S&P GCC Investable Shariah are positively related to the Islamic Stock Price Index but S&P Shariah Domestic Total Return Index is negatively related to the Islamic Stock Price Index. The main conclusion is that positive growth in the price of Islamic stocks depends on diversifying the Islamic investment portfolio to hedge against unexpected risks.

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Does the Sharia-compliant Status Removal Announcement Matter? Liquidity, Trading Activities and Institutional Investors

Rozaimah Zainudin,

Karren Lee-Hwei Khaw

2024

aamjaf

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On 29th November 2013, the Security Commission Malaysia revised the Sharia-compliant screening policy and about 20% of the Sharia firms lost their certification for not meeting the additional criteria. Using 107 affected firms, we examine the removal announcement effect on the stocks’ liquidity and trading activities. Our analysis focuses only on the removal announcement due to the screening policy changes. We use 181 days event window for the short-term effect and multivariate panel estimation models for the long-term effect. The event study observes a decreasing trend for the liquidity measures, indicating a higher liquidity post-Sharia removal announcement among the affected stocks. Conversely, trading activities decrease substantially within the first few days post-event date before picking up gradually. The regression analysis confirms the results, but we do not find consistent results supporting the relationship between institutional investors and liquidity and trading activities. The study is among the pioneers to unfold the effect of Sharia-compliant status removal announcement due to the policy changes on the stock liquidity and trading activities within short and long-term perspectives. We also provide post-effect evidence on the change of the institutional investors due to the removal announcement on the liquidity and trading aspect.

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Changes in trading volume and return volatility associated with S&P 500 index additions and deletions

Cited by 3 publications

References 55 publications

The Limits of Arbitrage and Stock Mispricing: Evidence from Decomposing the Market to Book Ratio

The Limits of Arbitrage and Stock Mispricing: Evidence from Decomposing the Market to Book Ratio

Portfolio Returns of Islamic Indices and Stock Prices in GCC Countries: Empirical Evidence From the ARDL Model

Does the Sharia-compliant Status Removal Announcement Matter? Liquidity, Trading Activities and Institutional Investors

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