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The price effects of index additions: A new explanation

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  • Liu, Shinhua

Abstract

We further explore a new volatility explanation for the permanent price effect of index additions, using a sample of changes in the Nikkei 225. Additions to the index elicit significant price hikes, which tend to be permanent despite temporary price reversals. Meanwhile, investor awareness and demand increase, while price volatility decreases for the added stocks, contrary to the higher price volatility for stocks added to the S&P 500. Moreover, multivariate regression analysis demonstrates that the lower volatility contributes significantly to the permanent price boost, a new explanation; so does the higher investor awareness, consistent with the prior literature.

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  • Liu, Shinhua, 2011. "The price effects of index additions: A new explanation," Journal of Economics and Business, Elsevier, vol. 63(2), pages 152-165, March.
    • Handle: RePEc:eee:jebusi:v:63:y::i:2:p:152-165
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    2. Friedrich-Carl Franz, 2020. "Forecasting index changes in the German DAX family," Journal of Asset Management, Palgrave Macmillan, vol. 21(2), pages 135-153, March.
    3. Daria Gavrilova, 2023. "Effects Of Index Additions On Stock Price Informativeness," Review of Economic and Business Studies, Alexandru Ioan Cuza University, Faculty of Economics and Business Administration, issue 31, pages 39-64, June.
    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. Upeksha Perera & Rohana Dissanayake & Mangalika Jayasundara, 2016. "Assessing the Impact of S&P SL20 Index Construction on Listed Companies in Colombo Stock Exchange (CSE)," International Journal of Economics and Finance, Canadian Center of Science and Education, vol. 8(7), pages 159-159, July.
    6. Gavrilova Daria, 2023. "The Price Impact of S&P 500 Affiliation," Studia Universitatis Babeș-Bolyai Oeconomica, Sciendo, vol. 68(1), pages 42-61, April.
    7. Neveen Ahmed & Aliaa Bassiouny, 2018. "The Effects of Index Changes on Stock Trading: Evidence from the EGX," Review of Economics & Finance, Better Advances Press, Canada, vol. 11, pages 55-66, February.
    8. Nico Katzke & Charlotte van Tiddens, 2019. "FTSE/JSE Index Migration: Testing for the Index Effect in Stocks Entering and Exiting the Top 40," Working Papers 10/2019, Stellenbosch University, Department of Economics.

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    More about this item

    Keywords

    Nikkei 225 Additions Price effects Explanations Price volatility;

    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
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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