We show a striking change in index return serial dependence across 20 major market indexes covering 15 countries in North America, Europe, and Asia. While many studies find serial dependence to be positive until the 1990s, it switches to negative since the 2000s. This change happens in most stock markets around the world and is both statistically significant and economically meaningful. Further tests reveal that the decline in serial dependence links to the increasing popularity of index products (e.g., futures, exchange-traded funds, and index mutual funds). The link between serial dependence and indexing is not driven by a time trend, holds up in the cross section of stock indexes, is confirmed by tests exploiting Nikkei 225 index weights and Standard & Poor's 500 membership, and in part reflects the arbitrage mechanism between index products and the underlying stocks.

Additional Metadata
Keywords Arbitrage, Exchange-traded funds (ETFs), Return autocorrelation, Stock market indexing
Persistent URL dx.doi.org/10.1016/j.jfineco.2018.07.016, hdl.handle.net/1765/113320
Journal Journal of Financial Economics
Citation
Baltussen, G, van Bekkum, S, & Da, Z. (Zhi). (2018). Indexing and stock market serial dependence around the world. Journal of Financial Economics. doi:10.1016/j.jfineco.2018.07.016