Comovement and FTSE 100 Index Changes

We employ the Barberis, Shleifer and Wurgler (2004) methodology to investigate the impact of changes to the FTSE 100 index on return comovement over the 1992-2002 period. For FTSE stock inclusions the average increase in the beta coe¢ cient is 0.38 in univariate regressions for weekly returns and 0.60 in bivariate regressions that control for the return on non-FTSE stocks. Stocks deleted from the index display the opposite pattern post exit. The results are robust to a number of factors including size, industry and non-trading e¤ects. They are di¢ cult to explain within a classical framework but complement those found for the US and Japan in supporting behavioral views of comovement. JEL classi…cation: G11, G12, G14 Keywords: Behavioral …nance; trading-based comovement, index funds. We thank Ana-Maria Fuertes, Eric Girardin, Terry Mills, Giorgio Valente, to participants at the Anglo-French Macroeconomics and Finance Workshop, University College Oxford, April 2004 and at seminars at the Universities of Essex and Loughborough for helpful comments. Kougoulis is grateful for …nancial support provided by the Greek State Scholarship Foundation (IKY). Corresponding author: Jerry Coakley, Department of Accounting, Finance and Management, University of Essex, Wivenhoe Park, Cochester C04 3SQ. Tel +44 1206 872455. Fax +44 1206 873429. E-mail: [email protected]