Price distortion induced by a flawed stock market index

Kotaro Miwa, Kazuhiro Ueda

Research output: Contribution to journalArticlepeer-review

1 Citation (Scopus)

Abstract

Despite the introduction of sophisticated stock market indices, investors often trade portfolios of the flawed indices to change their exposure to the market. In this study, we show that these transactions cause significant mispricing in individual stocks, especially during periods of significant market movement. As an influential, albeit flawed, stock index, we focus on the Nikkei 225. We find index constituents that are excessively weighted on the index, experience buying (selling) pressure when the stock market surges (falls), and experience price corrections after such periods of change. In contrast, non-constituent stocks do not experience such trading pressure.

Original languageEnglish
Pages (from-to)137-160
Number of pages24
JournalFinancial Markets and Portfolio Management
Volume30
Issue number2
DOIs
Publication statusPublished - Apr 25 2016
Externally publishedYes

All Science Journal Classification (ASJC) codes

  • Accounting
  • Finance

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