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Anticipatory effects in the FTSE 100 index revisions

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  • Fernandes, Marcelo
  • Mergulhão, João Filipe Bernardes Volkman
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    Abstract

    This paper examines the price impact of trading due to expected changes in theFTSE 100 index composition. We focus on the latter index because it employs publicly-known objective criteria to determine membership and hence it provides a natural contextto investigate anticipatory trading e ects. We propose a panel-regression event study thatbacks out these anticipatory e ects by looking at the price impact of the ex-ante proba-bility of changing index membership status. Our ndings reveal that anticipative tradingexplains about 40% and 23% of the cumulative abnormal returns of additions and deletions,respectively. We con rm these in-sample results out of sample by tracking the performanceof a trading strategy that relies on the addition/deletion probability estimates. The perfor-mance is indeed very promising in that it entails an average daily excess return of 11 basispoints over the FTSE 100 index.

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    Bibliographic Info

    Paper provided by Escola de Economia de São Paulo, Getulio Vargas Foundation (Brazil) in its series Textos para discussão with number 345.

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    Date of creation: 09 Dec 2013
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    Handle: RePEc:fgv:eesptd:345

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    1. Amihud, Yakov & Mendelson, Haim, 1986. "Asset pricing and the bid-ask spread," Journal of Financial Economics, Elsevier, vol. 17(2), pages 223-249, December.
    2. Vikas Agarwal, 2004. "Risks and Portfolio Decisions Involving Hedge Funds," Review of Financial Studies, Society for Financial Studies, vol. 17(1), pages 63-98.
    3. Ahern, Kenneth R., 2009. "Sample selection and event study estimation," Journal of Empirical Finance, Elsevier, vol. 16(3), pages 466-482, June.
    4. Brennan, Michael J. & Subrahmanyam, Avanidhar, 1996. "Market microstructure and asset pricing: On the compensation for illiquidity in stock returns," Journal of Financial Economics, Elsevier, vol. 41(3), pages 441-464, July.
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