standardandpoorsreitcompositeindexmovestoafree.docVIP

Standard and Poor’s REIT composite index moves to a free float: Downward-sloping demand curves for real estate stocks or liquidity changes? Bing-Xuan Lin David Michayluk* University of Rhode Island *corresponding author. 206 Ballentine Hall, College of Business Administration, University of Rhode Island, Kingston, RI 02881 Phone 401-874-5489 Fax 401-874-4312 email dave@uri.edu Standard and Poor’s REIT composite index moves to a free float: Downward-sloping demand curves for real estate stocks or liquidity changes? Abstract The weighting of companies in Standard and Poor’s indexes is being altered to reflect the available shares (free float) of companies rather than the entire market capitalization. This alteration has the goal of reducing the relative proportion of less liquid stocks and the SP stated that the cost of index investing should be reduced by this action. Index changes have been used to support downward sloping demand curve for stocks, but any liquidity alteration confounds the issue. This paper investigates liquidity surrounding the modification in the SP REIT composite index calculation to determine if the costs of and ability to trade are affected. REITs are of particular interest since their high liquidity relative to the underlying asset is one of their attractions. In addition, the relative liquidity of these stocks may be less than stocks in other SP indices, such that the effects of the change may be more evident. Liquidity estimates will be made using intraday data in the period before and after the two phases of the change. Data has been gathered for the pre-period in advance of the move to a half-float on March 18, 2005 for all stocks in the SP REIT composite index trading on the New York Stock Exchange. Estimates of both friction-based and activity-based liquidity measures will be made in the pre- and post-change periods using the intraday data, and the measurements will be compared using parametric