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Index-tracking rigidity and arbitrage opportunities in MSCI index reconstitutions

Author

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  • Chang, Xin
  • Luo, Jiang
  • Peng, Jiaxin
  • Qian, Shuoge
  • Tan, Choon Wee

Abstract

Using the reconstitution of MSCI indices in 56 markets worldwide from 2006 to 2023, we discover arbitrage opportunities arising from index-tracking investors' rigidity to minimize tracking errors around the dates when index reconstitution changes become effective (i.e., effective dates). We document pronounced abnormal returns and trading volume on the last trading day before the effective date. Arbitrageurs can exploit this predictable pattern of stock price changes and earn sizable abnormal returns if they long the added and short the deleted stocks on the announcement date and close their positions at the end of the day before the effective date. Additional analysis reveals how index-tracking investors and arbitragers interact to shape stock prices and equity-lending activities around MSCI index reconstitutions.

Suggested Citation

  • Chang, Xin & Luo, Jiang & Peng, Jiaxin & Qian, Shuoge & Tan, Choon Wee, 2025. "Index-tracking rigidity and arbitrage opportunities in MSCI index reconstitutions," Pacific-Basin Finance Journal, Elsevier, vol. 93(C).
    • Handle: RePEc:eee:pacfin:v:93:y:2025:i:c:s0927538x25002379
    DOI: 10.1016/j.pacfin.2025.102900
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    1. Min, Shiyao & Dai, Bin & Wu, Qiqi, 2026. "When global standards meet local firms: Capital market internationalization and the decline of R&D manipulation," Research in International Business and Finance, Elsevier, vol. 81(C).

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    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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