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The Effect Of Dow Jones Industrial Average Index Component Changes On Stock Returns And Trading Volumes

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  • Eric C. Lin

Abstract

This study examines the impact of index membership changes in Dow Jones Industrial Average (DJIA) Index on the return and trading volume of the affected stock. We make two key contributions to the literature. First, we employ a robust event study methodology based on Fama-French Momentum Model with EGARCH to explore the price/volume dynamics associated with DJIA Index additions and deletions. Second, we extend earlier work by incorporating all index reconstitution announcements after Dow Jones & Company began preannouncing index changes in 1990. Our results show that index additions (deletions) experience temporary increases (decreases) in stock prices following the announcement. The abnormal returns surrounding the announcements are economically and statistically significant. In addition, both inclusions and removals lead to temporary abnormal trading volume increases in the post-announcement period. However, the stock prices and trading volumes revert within a few trading days. Our findings are consistent with the price pressure hypothesis as the documented abnormal returns and trading volumes are not permanent.

Suggested Citation

  • Eric C. Lin, 2018. "The Effect Of Dow Jones Industrial Average Index Component Changes On Stock Returns And Trading Volumes," The International Journal of Business and Finance Research, The Institute for Business and Finance Research, vol. 12(1), pages 81-92.
    • Handle: RePEc:ibf:ijbfre:v:12:y:2018:i:1:p:81-92
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    References listed on IDEAS

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    More about this item

    Keywords

    Dow Jones; Event Study; Index Reconstitution; Fama-French Momentum Model; Abnormal Return and Volume;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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