Changes In Index Composition Research Articles

Pension Fund Trading Behavior and the Index Inclusion: Evidence from the Korean Stock Market

ABSTRACT In this paper, we study the trading effect of Korean pension funds on price change around index inclusions. We find that pension funds strategically respond to index composition changes, and their demand for newly included stocks is high and persistent. The liquidity providers for the demand of pension funds are individual investors. We also find the significant and positive effect of pension funds’ trading on newly included stocks’ prices following the announcement date. On the other hand, we could not find evidence of a positively persistent relationship between the trades of different types of investors and newly added stock returns. Overall, our findings highlight that the trading of pension funds can be an important explanatory factor for the index inclusion effects.

Effects of changes in stock market index composition on stock returns: event study methodology on Zagreb Stock Exchange

Abstract This paper observes the short-run effects of stock market index composition changes on stock returns on the Zagreb Stock Exchange (ZSE). In that way, event study methodology is employed in order to estimate abnormal returns and compare them amongst three subsets of stocks: those leaving the market index, those entering it, and constantly included stocks. The research included 14 regular and extraordinary revisions of the market index in the period from January 2nd, 2015 until March 21st, 2018. The results have confirmed two research hypotheses: stock exclusions from the market index have a negative effect on stock returns on the ZSE, which is consistent with the price pressure hypothesis; and there exist asymmetric effects of index composition changes on stock returns. This is the first study of this kind on the Croatian stock market, thus more questions need to be answered in future research.

Information asymmetry around S&P 500 index changes

Purpose – This study aims to explore information asymmetry (IA) (as measured by the adverse selection component of the bid-ask spread) around S&P 500 revisions. Design/methodology/approach – The authors use adverse selection cost of trading measures to examine the effects of S&P 500 index composition changes on the trading environment from 2001 to 2010. Findings – The authors find that the adverse selection cost of trading significantly decreases post-addition and increases post-deletion. However, the intraday price dynamics of additions to the index seem to be distinct from those of deletions from the index. The event period cumulative abnormal returns (CARs) for additions are significantly associated with the change in the adverse selection cost of trading. However, this association is non-significant for deletions. The CARs for deletion events are found to be significantly associated with the change in realized spreads. Realized spreads are a measure of revenue earned by liquidity providers in the market. Originality/value – This study helps better understand the dynamics of two types of IA – one from a firm to investor and the other between investors – and presents evidence of the role of adverse selection in index changes. By doing so, it helps better understand the mechanism driving price formation post-addition to and deletion from an index.

The Market Impact on Shares Entering or Leaving JSE Indices

A company's entry into (or exit from) a major share index provides a special opportunity to examine price discovery. In an efficient market, we expect the demand curve to remain horizontal and to be unaffected by external events that do not communicate new information to the public, even if demand is affected. However, there is evidence that changes to index composition do impact the value of affected shares. This may be due to the price pressure generated by passively managed investment funds that simultaneously reconstitute their portfolios in order to remain aligned to the index they are tracking. This study investigates downward sloping demand curves, price pressure and other hypotheses which are related to changes in index composition on the Johannesburg Stock Exchange (JSE). We calculate abnormal returns using a control portfolio model for shares entering/exiting four major FTSE/JSE indices between 2002 and 2011. In the pre-event window, a long-term increasing trend was observed in the share prices ...

The market impact on shares entering or leaving JSE indices

A company's entry into (or exit from) a major share index provides a special opportunity to examine price discovery. In an efficient market, we expect the demand curve to remain horizontal and to be unaffected by external events that do not communicate new information to the public, even if demand is affected. However, there is evidence that changes to index composition do impact the value of affected shares. This may be due to the price pressure generated by passively managed investment funds that simultaneously reconstitute their portfolios in order to remain aligned to the index they are tracking. This study investigates downward sloping demand curves, price pressure and other hypotheses which are related to changes in index composition on the Johannesburg Stock Exchange (JSE). We calculate abnormal returns using a control portfolio model for shares entering/exiting four major FTSE/JSE indices between 2002 and 2011. In the pre-event window, a long-term increasing trend was observed in the share prices of companies that are added to market cap weighted indices, beginning 70 trading days before the effective date. The opposite behaviour was true for index deletions, with some variation in the timing. In the post-event window the results show, to some extent, an asymmetric response to share returns; shares entering the index underperform thereafter, whereas those leaving the index outperform. Although these findings were not significant for all of the indices examined, they do support the Price Pressure Hypothesis of Harris and Gurel.

Associated effects of index composition changes: an evidence from the S&P CNX Nifty 50 index

Purpose – The purpose of this paper is to test the long-term effects of price and volume with the help of Downward Sloping Demand Curve (DSDC) hypothesis, and also the short-term price and volume effects with the help of Price Pressure Hypothesis (PPH) for the index revisions on the S&P CNX Nifty 50 index. Design/methodology/approach – In order to report the long-term and short-term effects, the current study reviews two testable hypotheses, namely, DSDC hypothesis and PPH. The study has used the event study approach by including GARCH (1, 1) conditional variance in the market model. Findings – The results report that, the added stocks experienced a significant increase in price and volume on the effective date; whereas the deleted stocks experienced significant volume levels and insignificant price levels on the effective date. Accordingly, the study finds support in favor of PPH. Research limitations/implications – The study could not find evidence to support the most studied DSDC hypothesis. Practical implications – Index reorganization presumably affects the fund managers, domestic as well as international investors. As a result, studying the effect of index changes is a subject of attention to academicians and investors alike. Originality/value – The study contributes to the body of knowledge on index inclusion and exclusion effects by providing Indian evidence on long-term and short-term price and volume effects, and also documenting contrary results to the previous Indian and global research works.

Index composition changes and the cost of incumbency

This paper provides evidence of information effects and portfolio rebalancing effects that occur when stocks are added to or excluded from the S&P 500 index and finds that incumbents in the index realize negative excess returns when S&P revises the composition of the index. We also find that for incumbents that are in the same industry as the added firm, the price-pressure effects are mitigated by positive industry-level information and momentum effects. For index exclusions, the magnitude of the loss sustained by incumbents from the same industry as the excluded firm is larger than that realized by the non-industry incumbents, as the negative information and momentum effects reinforce the price-pressure effects. Our results suggest that changes in the composition of the index are not information-free events; however, the portfolio rebalancing effects dominate the industry information effects.

Acting on the Most Valuable Information: "Best Idea" Trades of Mutual Fund Managers

I propose a proxy for how attractive a given trade is to the fund manager who makes it and find evidence that mutual fund managers exhibit substantial skill in trades they ex ante identify as more promising. The proxy for ``best ideas'' does not use any performance-related variables. Instead, it is based on common trades of managers from the same management company. Such managers likely have access to similar information. The more important the new information they receive, the more likely it is that multiple managers will act on it and engage in similar trades. Best ideas outperform benchmarks and other fund trades by as much as 47 basis points per month. This effect is already apparent for trades at least two same-company managers make and its magnitude is increasing in the number of managers trading. The outperformance is visible not only in a subset of fund trades, but also in funds' after-fee returns: Funds which participate in best idea trades beat other funds by up to 0.3% per quarter. The remaining fund trades (not best ideas) fail to beat passive benchmarks even before expenses, e.g., their average characteristic-adjusted return is statistically insignificant 3 basis points per month. The performance of best ideas is not explained by herding. In fact, there is some evidence that trades made by multiple unrelated managers (managers from different companies) underperform passive benchmarks even before expenses. The effect is also robust to other alternative explanations (e.g., short-term liquidity pressures, changes in index composition, or funds' reaction to analyst revisions), and does not revert in the long term.

The Cost of Trading Transparency: What We Know, What We Don’t Know, and How We Will Know

Results from several major studies of index composition changes indicate that trading transparency accounts for more than half the market impact cost of composition changes in the two most popular U.S. indices. The growth of transparent custom index exchange-traded funds (ETFs) and the introduction of actively managed ETFs with relatively transparent trading will increase investor exposure to trading transparency costs. Fortunately, researchers can quantify the performance penalty that trading transparency imposes on investors.

Do Index Effects Reflect Idiosyncratic or Industry Effects? A Re-Examination of the Winners and Losers of S&P 500 Index Addition

This paper provides new findings concerning additions to the S&P 500 Index. We present the first evidence of industry effects that occur when stocks are added to the S&P 500 Index. With over a trillion dollars in index funds wealth tied to the S&P 500 Index, index additions exert price pressures on not only the firms that are added to the index and but the incumbent industry counterparts as well. We find that the share price of an added firm's industry counterparts increase in the announcement date and decrease on the effective date. We provide evidence that portfolio rebalancing helps explain the effective date abnormal returns documented for the incumbent industry counterparts. In addition, we show that the likelihood of a company being added to the S&P 500 Index is higher in industries with strong innovative activity, making revisions to the Index a vehicle for incorporating the value of such activity. Overall, our results suggest that S&P 500 Index composition changes are not information-free events.

The S&P 500 Index Effect in Continuous Time: Evidence from Overnight, Intraday and Tick-By-Tick Stock Price Performance

The advent of index tracking early in the 1970s and the continuous growth of assets tied to the S&P 500 index have enforced perceptions of the importance of becoming an index-member, due to increased demand by index fund participants for the stocks involved in index composition changes. This study focuses on S&P 500 inclusions and examines the impact of potential overnight price adjustment after the announcement of an S&P 500 index change. We find evidence of a significant overnight price change that diminishes the profits available to speculators although there are still profits available from the first day after announcement until a few days after the actual event. More importantly observing the tick-by-tick stock price performance of the key days of the event window for the first time, we find evidence of consistent trading patterns during trading hours over inclusion event. A separate analysis of two different sub-periods as well as of NASDAQ and NYSE listed stocks allows for a detailed examination of the price and volume effect in continuous time.

The effects of changes in index composition on stock prices and volume: Evidence from the Istanbul stock exchange

Previous evidence has shown that stocks included in (excluded from) an index exhibit significant positive (negative) abnormal returns on the announcement day, and that trading volume is affected by the event. This study examines the price and volume effects on stocks associated with the changes in the value-weighted index composition of two indices, of the ISE, where the index funds and index derivatives do not exist. Consistent with previous evidence, stocks included in (excluded from) the index tend to generate positive (negative) abnormal returns in ISE. Volume and volume volatility are also significantly affected. Our results seem to support the hypotheses of price-pressure, imperfect substitute and attention due to the lack of index-funds and derivatives market in Turkey.

Does the response of competitors to privatization announcements reflect competitive or industry-wide information effects? International evidence

We examine the stock price reaction of rival firms to the announcement of the privatization of their industry counterparts to infer information about the intra-industry effects of privatization. We find that the rival firms reacted negatively to the privatization announcements, suggesting that the announcement effects reflect competitive rather than positive industry effects. The reaction is stronger for industry counterparts in low economic freedom countries than those in high economic freedom countries. Interestingly, we also find that full privatization announcements generate larger negative abnormal returns for rival firms than partial privatization announcements where the privatized firm gains only partial autonomy from the government. In this regard, we find that, as the proportion of government ownership reduces, subsequent partial privatization announcement elicits stronger market reaction from rival firms. The negative abnormal returns earned by shareholders of rival firms are not due to price pressure and portfolio rebalancing effects resulting from index composition changes. We conclude that the negative effects documented for the rival firms reflect investors' concern about the potential competitive effects resulting from privatization of the state enterprise.

Effects of Changes in Index Composition on Stock Market: Evidence from the Istanbul Stock Exchange

Effects of Changes in Index Composition on Stock Market: Evidence from the Istanbul Stock Exchange

New Evidence on Stock Price Effects Associated with Changes in the S&P 500 Index

Since October 1989, Standard and Poor's has (when possible) announced changes in the composition of the S&P 500 index one week in advance. Because index funds hold S&P 500 stocks to minimize tracking error, index composition changes since this date provide an opportunity to examine the market reaction to an anticipated change in the demand for a stock. Using post-October 1989 data, the authors document significantly positive (negative) postannouncement abnormal returns that are only partially reversed following additions (deletions). These results indicate the existence of temporary price pressing and downward-sloping long-run demand curves for stocks and represent a violation of market efficiency. Copyright 1997 by University of Chicago Press.