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Investing in the Presence of Massive Flows: The Case of MSCI Country Reclassifications

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Listed:
  • Terence C. Burnham
  • Harry Gakidis
  • Jeffrey Wurgler

Abstract

Almost $10 trillion is benchmarked to Morgan Stanley Capital International’s Developed, Emerging, Frontier, and standalone market indexes. Reclassifications from one index to another require thousands of investors to decide how to react. We study a comprehensive sample of past reclassifications to inform this decision. On average, reclassified markets’ prices substantially overshoot between the announcement and effective dates—prices fall when a market moves from an index with more benchmarked ownership to one with less, such from Emerging to Frontier, and vice-versa—but largely revert within a year. We identify alpha-maximizing responses to reclassifications for both benchmarked and more flexible investors.

Suggested Citation

  • Terence C. Burnham & Harry Gakidis & Jeffrey Wurgler, 2017. "Investing in the Presence of Massive Flows: The Case of MSCI Country Reclassifications," NBER Working Papers 23557, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:23557
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    References listed on IDEAS

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    More about this item

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • 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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