Financial Markets and Portfolio Management

, Volume 30, Issue 2, pp 137–160 | Cite as

Price distortion induced by a flawed stock market index

Article

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.

Keywords

Stock market index Price-weighted index Trading pressure  Stock mispricing 

JEL Classification

G14 G17 G23 

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Copyright information

© Swiss Society for Financial Market Research 2016

Authors and Affiliations

  1. 1.Tokio Marine Asset Management Co., LtdTokyoJapan
  2. 2.Graduate School of Arts and SciencesThe University of TokyoTokyoJapan

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