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The effect of changes in index constitution: Evidence from the Korean stock market

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  • Yun, Jooyoung
  • Kim, Tong S.

Abstract

This paper examines the effect of changes in the KOSPI 200 index. We find evidence of permanent price effects and partial return reversal for the event stocks. Trading volumes tend to significantly increase during the event period and remain relatively higher than before the event. We also find some evidence of the existence of anticipatory trading effect before the effective dates and volatility effect. The results show that the abnormal return still exists even after adopting factor models and excluding newly added stocks. The indexing methodology of KOSPI 200 conveys the valuable information that the added stocks showed good performance and better earnings relative to the market average and the deleted stocks showed vice versa. In conclusion, member changes in the KOSPI 200 index are not information-free events.

Suggested Citation

  • Yun, Jooyoung & Kim, Tong S., 2010. "The effect of changes in index constitution: Evidence from the Korean stock market," International Review of Financial Analysis, Elsevier, vol. 19(4), pages 258-269, September.
    • Handle: RePEc:eee:finana:v:19:y:2010:i:4:p:258-269
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    4. Azevedo, Alcino & Karim, Mohamad & Gregoriou, Andros & Rhodes, Mark, 2014. "Stock price and volume effects associated with changes in the composition of the FTSE Bursa Malaysian KLCI," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 28(C), pages 20-35.
    5. Wang, Chuan & Murgulov, Zoltan & Haman, Janto, 2015. "Impact of changes in the CSI 300 Index constituents," Emerging Markets Review, Elsevier, vol. 24(C), pages 13-33.
    6. Gang Chu & John W. Goodell & Xiao Li & Yongjie Zhang, 2023. "Understanding short‐term price pressure from index reconstitutions: Evidence from the CSI 300," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 63(2), pages 2421-2440, June.
    7. Chen, Wei-Kuang & Lin, Ching-Ting, 2016. "Asymmetric responses to stock index reconstitutions: Evidence from the CSI 300 index additions and deletions," Pacific-Basin Finance Journal, Elsevier, vol. 40(PA), pages 36-48.

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