Is there an index effect in frontier markets?

This study examines short-term stock market reactions to changes in the FTSE Frontier 50 index from 2008 to 2025 across 30 frontier markets in Africa, Asia, Europe, and South America. Frontier markets differ from developed and emerging markets in liquidity, investor participation, and market segmentation, raising questions about whether established index effect theories generalize to these less developed settings. Using a multi-country event-study framework combined with analyses of trading volume, liquidity measures, institutional ownership, and cross-sectional regressions, we evaluate competing explanations for abnormal returns around index reconstitutions. We distinguish between new, repeated, and country reclassification–driven additions and deletions. Both new and repeated additions experience persistent stock price increases, while new and repeated deletions generally face persistent declines, although some effects weaken in the post-COVID period. In contrast, reclassification deletions show stock price reversals. Changes in liquidity and institutional ownership are generally insignificant and exhibit limited explanatory power for abnormal returns, whereas pre-event institutional ownership is positively related to cumulative abnormal returns. Overall, the results indicate that stock prices in frontier markets tend to rise persistently after index inclusion and fall after exclusion due to institutional investor demand rather than temporary trading pressure or liquidity changes.