Evidence of Crowding on Russell 3000 Reconstitution Events

What the paper says

We develop a methodology which replicates in great accuracy the FTSE Russell indexes reconstitutions, including the quarterly rebalancings due to new initial public offerings (IPOs). While using only data available in the CRSP US Stock database for our index reconstruction, we demonstrate the accuracy of this methodology by comparing it to the original Russell US indexes for the time period between 1989 and 2019. A python package that generates the replicated indexes is also provided [A Micheli. pyndex — Russell index reconstruction package. Available at https://github.com/alemicheli/pyndex .]. As an application, we use our index reconstruction protocol to compute the permanent and temporary price impact on the Russell 3000 annual additions and deletions, and on the quarterly additions of new IPOs. We find that the index portfolios following the Russell 3000 index and rebalanced on an annual basis are overall more crowded than those following the index on a quarterly basis. This phenomenon implies that transaction costs of indexing strategies could be significantly reduced by buying new IPOs additions in proximity to quarterly rebalance dates.