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The Anatomy of Index Rebalancings: Evidence from Transaction Data

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Abstract

We exploit novel transaction-level data from Colombia to analyze episodes of additions to and deletions from MSCI equity indexes. We fnd additions and deletions to have large price effects (5.5%). We show that these effects are due to large demand shocks by different classes of international investors - beyond passive funds and ETFs - which are not absorbed by arbitrageurs. Consistent with asset pricing models with limits to arbitrage, stock demand curves are very inelastic: the median elasticity in our sample is -0.34, implying that a 1% increase in the demand for a stock increases its price by 2.9%.

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  • Mariana Escobar & Lorenzo Pandolfi & Alvaro Pedraza & Tomas Williams, 2021. "The Anatomy of Index Rebalancings: Evidence from Transaction Data," CSEF Working Papers 621, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy, revised 12 2021.
    • Handle: RePEc:sef:csefwp:621
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    Keywords

    index rebalancings; institutional investors; stocks demand elasticity; passive funds; arbitrage;
    All these keywords.

    JEL classification:

    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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