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EXCESS RETURNS OF INDEX REPLACEMENT STOCKS: EVIDENCE OF LIQUIDITY AND SUBSTITUTABILITY
Author(s) -
Edmister Robert O.,
Graham A. Steven,
Pirie Wendy L.
Publication year - 1994
Publication title -
journal of financial research
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.319
H-Index - 49
eISSN - 1475-6803
pISSN - 0270-2592
DOI - 10.1111/j.1475-6803.1994.tb00196.x
Subject(s) - economics , excess return , stock (firearms) , market liquidity , econometrics , index (typography) , monetary economics , stock market index , stock market , financial economics , mechanical engineering , paleontology , context (archaeology) , horse , world wide web , computer science , engineering , biology
Excess returns of S&P index replacement stocks are attributed to price pressures and imperfect substitutes in previous research. However, parameter estimates are biased by the use of pre‐announcement returns; replacements are characterized by rising stock prices. Using a future estimation period to avoid this bias, we find excess returns do not reverse. Further, we find no relation between excess returns and the amount of stock closely held or the size of index funds. The evidence supports efficient market assumptions: the stock market is liquid and stocks are close substitutes.