Advertisement

Financial Markets and Portfolio Management

, Volume 28, Issue 3, pp 281–303 | Cite as

Abnormal investor response to the index effect for daily and intraday data

  • Tchai TavorEmail author
Article
  • 155 Downloads

Abstract

Events that directly affect stock indices are of considerable importance to various index instruments such as ETFs and index funds. One of the most important of such events involves updating the index, which takes place once or twice per year. The effect this has on the capital markets is known as the “index effect”, and it is one of the strongest and most influential long-term effects. Using two different methods, I examine how the index effect impacts the Israeli capital markets. I examine the three leading market indices—the Tel-Aviv 25, the Tel-Aviv 75, and the Tel-Tech 15—for firms whose stocks enter and exit their respective index for both daily and intraday data. In the first examination, I divide the sample based on firms entering/exiting each of these three market indices and examine the index effect using daily data. This analysis shows that the market responds differently for firms entering and exiting the Tel-Aviv 25 than it does for the two other indices. For the second examination, the sample is divided based on each stock’s volatility during the period prior to the event using intraday data. This analysis shows that more volatile stocks respond more strongly to the indexing event.

Keywords

Index effect Investment behavior Market efficiency  Event studies approach 

JEL Classification

G10 G14 G19 

Notes

Acknowledgments

I thank the anonymous referee for helpful comments.

References

  1. Andres, C., Betzer, A., Weir, C.: Shareholder wealth gains through better corporate governance-the case of European LBO-transactions. Finan. Mark. Portfolio Manag. 21(4), 403–424 (2007)CrossRefGoogle Scholar
  2. Cai, J.: What’s in the news? Information content of S&P 500 additions. Finan. Manag. 36(3), 113–124 (2007)CrossRefGoogle Scholar
  3. Chen, H.: On Russell index reconstitution. Rev. Quanti. Finan. Account. 26(4), 409–430 (2006)CrossRefGoogle Scholar
  4. Chen, H., Noronha, G., Singal, V.: The price response to S&P 500 index additions and deletions: evidence of asymmetry and a new explanation. J. Finan. 59(4), 1901–1930 (2004)CrossRefGoogle Scholar
  5. Clayton, J., MacKinnon, G.: The relative importance of stock, bond and real estate factors costs, and capital structure. J. Finan. Econom. 3(4), 305–360 (2003)Google Scholar
  6. Cusick, P.: Price effects of addition or deletion from the standard and poor’s 500 index: evidence of increasing market efficiency. Finan. Market. 11, 349–383 (2001)Google Scholar
  7. Dash, S.: Price changes associated with S&P 500 deletions: time variation and effect of size and share price, In: working paper, available at: https://doi.org/www.2standardandpoors.com (2002)
  8. Docking, D., Dowen, R.: Evidence on stock price effects associated with changes in the S&P 600 smallCap index. Quarter. J. Bus. Econom. 45(1), 89–114 (2006)Google Scholar
  9. Gregoriou, A., Ioannidis, C.: Liquidity effects due to information costs from changes in the FTSE 100 List, In: Economics and Finance Discussion Papers 03–02, Brunel University, UK (2003)Google Scholar
  10. Hackethal, A., Zdantchouk, A.: Signaling power of open market share repurchases in Germany. Finan. Mark. Portfolio Manag. 20, 123–151 (2006)CrossRefGoogle Scholar
  11. Harris, L., Gurel, E.: Price and volume effects associated with changes in the S&P 500 list. J. Finan. 41(4), 815–829 (1986)CrossRefGoogle Scholar
  12. Hoesli, M., Camilo, S.M.: Securitized real estate and its link with financial assets and real estate: an international analysis. J. Real Estate Liter. 15(1), 59–84 (2007)Google Scholar
  13. Kappou, K., Brooks, C., Ward, C.: The S&P500 index effect reconsidered: evidence from overnight and intraday stock price performance and volume. J. Bank. Finan. 34(1), 116–126 (2010)CrossRefGoogle Scholar
  14. Lee, C., Ready, M., Seguin, P.: Volume, volatility and New York stock exchange trading halts. J. Finan. 49, 183–214 (1994)CrossRefGoogle Scholar
  15. Lynch, A.W., Mendenhall, R.R.: New evidence on stock price effects associated with changes in the S&P 500 index. J. Bus. 70(3), 351–383 (1997)CrossRefGoogle Scholar
  16. MacKinlay, C.A.: Event studies in economics and finance. J. Econom. Liter. 35, 13–39 (1997)Google Scholar
  17. Madhavan, A.: The Russell reconstitution effect. Finan. Analysts J. 59, 51–64 (2003)CrossRefGoogle Scholar
  18. Pinfold, J., Qiu, M.: Price and trading volume reactions to index constitution changes: the Australian evidence. Manag. Finan. 34(1), 53–69 (2008)Google Scholar
  19. Shleifer, A.: Do demand curves for stocks slope down? J. Finan. 41, 579–590 (1986)CrossRefGoogle Scholar
  20. Smith, B.F., White, R., Robinson, M., Neson, R.: Intraday volatility and trading volume after takeover announcements. J. Bank. Finan. 21, 337–368 (1997)CrossRefGoogle Scholar
  21. Tavor, T.: The index effect—is it possible to predict? J. Adv. Stud. Finan. 2(4), 176–184 (2011)Google Scholar
  22. Vijh, A.M.: S&P 500 trading strategies and stock betas. Rev. Finan. Stud. 7, 215–251 (1994)CrossRefGoogle Scholar
  23. Zhou, H.: Asymmetric changes in stock prices and investor recognition around revisions to the S&P 500 index. Finan. Analysts J. 67(1), 72–84 (2011)CrossRefGoogle Scholar

Copyright information

© Swiss Society for Financial Market Research 2014

Authors and Affiliations

  1. 1.Department of Economics and ManagementYizrael Valley CollegeYizrael ValleyIsrael

Personalised recommendations