Do anticipated changes in the MSCI Taiwan index drive investor behavior?

Abstract

Using orders submitted to the Taiwan Stock Exchange (TWSE), we find that foreign investors buy (sell) more additions (deletions) during the event period than individual investors. Domestic institutions do the opposite of foreign investors on the day before the effective day (ED). By grouping foreign investors into indexers, quasi-indexers, and non-indexers and classifying orders into aggressive and conservative, we find that both indexers and non-indexers display a pattern of indexing during the event period and prefer to buy additions through aggressive orders. In particular, indexers cluster their rebalancing activity around ED while non-indexers spread their orders during the event period.