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

  • Yun, Jooyoung
  • Kim, Tong S.
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    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.

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    File URL: http://www.sciencedirect.com/science/article/B6W4W-50V5NPD-2/2/2eedde2c7ebbcccc14c58f5ad403d868
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    Article provided by Elsevier in its journal International Review of Financial Analysis.

    Volume (Year): 19 (2010)
    Issue (Month): 4 (September)
    Pages: 258-269

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    Handle: RePEc:eee:finana:v:19:y:2010:i:4:p:258-269
    Contact details of provider: Web page: http://www.elsevier.com/locate/inca/620166

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    1. Hsiu-Lang Chen, 2006. "On Russell index reconstitution," Review of Quantitative Finance and Accounting, Springer, vol. 26(4), pages 409-430, June.
    2. Mei Qiu & John Pinfold, 2008. "Price and trading volume reactions to index constitution changes: The Australian evidence," Managerial Finance, Emerald Group Publishing, vol. 34(1), pages 53-69.
    3. Shinhua Liu, 2000. "Changes in the Nikkei 500: New Evidence for Downward Sloping Demand Curves for Stocks," International Review of Finance, International Review of Finance Ltd., vol. 1(4), pages 245-267.
    4. John R. Becker-Blease & Donna L. Paul, 2006. "Stock Liquidity and Investment Opportunities: Evidence from Index Additions," Financial Management, Financial Management Association International, vol. 35(3), pages 35-51, 09.
    5. Beneish, Messod D. & Gardner, John C., 1995. "Information Costs and Liquidity Effects from Changes in the Dow Jones Industrial Average List," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 30(01), pages 135-157, March.
    6. Shleifer, Andrei, 1986. " Do Demand Curves for Stocks Slope Down?," Journal of Finance, American Finance Association, vol. 41(3), pages 579-90, July.
    7. Bryan Mase, 2008. "Comovement in the FTSE 100 Index," Applied Financial Economics Letters, Taylor and Francis Journals, vol. 4(1), pages 9-12.
    8. Jeffrey Wurgler & Ekaterina Zhuravskaya, 2002. "Does Arbitrage Flatten Demand Curves for Stocks?," The Journal of Business, University of Chicago Press, vol. 75(4), pages 583-608, October.
    9. Amihud, Yakov & Mendelson, Haim, 1986. "Asset pricing and the bid-ask spread," Journal of Financial Economics, Elsevier, vol. 17(2), pages 223-249, December.
    10. Bildik, Recep & Gulay, Guzhan, 2008. "The effects of changes in index composition on stock prices and volume: Evidence from the Istanbul stock exchange," International Review of Financial Analysis, Elsevier, vol. 17(1), pages 178-197.
    11. Brown, Stephen J. & Warner, Jerold B., 1985. "Using daily stock returns : The case of event studies," Journal of Financial Economics, Elsevier, vol. 14(1), pages 3-31, March.
    12. Ernest N. Biktimirov & Arnold R. Cowan & Bradford D. Jordan, 2004. "Do Demand Curves for Small Stocks Slope Down?," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 27(2), pages 161-178.
    13. Isidore Masse & Robert Hanrahan & Joseph Kushner & Felice Martinello, 2000. "The effect of additions to or deletions from the TSE 300 Index on Canadian share prices," Canadian Journal of Economics, Canadian Economics Association, vol. 33(2), pages 341-359, May.
    14. John R. Becker-Blease & Donna L. Paul, 2006. "Stock Liquidity and Investment Opportunities: Evidence from Index Additions," Financial Management, Financial Management Association, vol. 35(3), Autumn.
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