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Do emerging markets benefit from index inclusion?

Author

Listed:
  • Burcu Hacibedel

    (University of Oxford, Said Business School)

  • Jos van Bommel

    (University of Oxford, Said Business School)

Abstract

In this paper, we study the returns of emerging market stocks that are included in the MSCI Emerging Markets index, a widely used benchmark for investment funds. Our sample consists of 269 stocks from 24 countries that were added to the index and 262 stocks that were deleted. We find convincing evidence of positive (negative) permanent price impacts upon index inclusion (exclusion). We attribute this to the radar screen effect (Merton, 1987), which predicts that more visible stocks attract more (distant) investors and hence require lower expected returns. Consistent with this theory, we find that betas with respect to the index increase, while those of the local indices decrease. When we analyse returns over an event window from before announcement to after inclusion, we find evidence of a pronounced short term drift which is partially reversed at the inclusion date. We attribute this short term phenomenon to limited arbitrage on the predictable portfolio rebalancing behaviour of tracker funds

Suggested Citation

  • Burcu Hacibedel & Jos van Bommel, 2007. "Do emerging markets benefit from index inclusion?," Money Macro and Finance (MMF) Research Group Conference 2006 128, Money Macro and Finance Research Group.
    • Handle: RePEc:mmf:mmfc06:128
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    File URL: http://repec.org/mmf2006/up.16680.1145726171.pdf
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    Citations

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    Cited by:

    1. Afego, Pyemo N., 2017. "Effects of changes in stock index compositions: A literature survey," International Review of Financial Analysis, Elsevier, vol. 52(C), pages 228-239.
    2. Broner, Fernando & Martin, Alberto & Pandolfi, Lorenzo & Williams, Tomas, 2021. "Winners and losers from sovereign debt inflows," Journal of International Economics, Elsevier, vol. 130(C).
    3. Yuelin Li & Mehdi Sadeghi, 2009. "Price Performance and Liquidity Effects of Index Additions and Deletions: Evidence from Chinese Equity Markets," Asian Journal of Finance & Accounting, Macrothink Institute, vol. 1(2), pages 1652-1652, December.

    More about this item

    Keywords

    index inclusions; asset pricing; market efficiency; emerging markets;
    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
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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