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ABSTRACT
In this article, I take advantage of the revision of the Dow Jones Industrial Average (DJIA) index membership in 1999, to study the environment for high-frequency trading back then. Between stocks leaving or joining the DJIA, and similar stocks remaining in the DJIA, consistent price lead and lag relationships can be established. This provides evidence that statistical arbitrage is entirely feasible at the time, and it is plausible that a significant portion of the trading volume in 1999 is due to high-frequency trading.
JEL CLASSIFICATION:
Acknowledgements
I am extremely grateful to Maria Kasch for her help and her generosity on this paper. I would also like to thank Robert Engle, Peter Hammond, Joel Hasbrouck, Shuyun Li, Matt Luskey, Richard Olsen, Mohsen Saad, Erik Theissen and participants at various seminars and conferences for their comments on the current or previous versions of this paper. All errors are my own responsibility.
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