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Asymmetric stock price and liquidity responses to changes in the FTSE SmallCap index

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  • Ernest Biktimirov

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  • Boya Li

Abstract

We examine market reactions to changes in the FTSE SmallCap index membership, which are determined quarterly based on market capitalization and are free of information effects. Our main results are asymmetric price and liquidity responses between the firms that are shifted between FTSE indexes and the firms that are new to FTSE indexes. Firms promoted from a smaller-cap to a larger-cap FTSE index experience a permanent increase in stock price accompanied by improvements in liquidity. Similarly, firms demoted from a larger-cap to a smaller-cap FTSE index experience a permanent decrease in stock price accompanied by declines in liquidity. In contrast, firms added to the FTSE SmallCap index that were not previously in FTSE indexes show a transitory price gain and declines in liquidity. The results support the liquidity and price pressure hypotheses. Copyright Springer Science+Business Media New York 2014

Suggested Citation

  • Ernest Biktimirov & Boya Li, 2014. "Asymmetric stock price and liquidity responses to changes in the FTSE SmallCap index," Review of Quantitative Finance and Accounting, Springer, vol. 42(1), pages 95-122, January.
  • Handle: RePEc:kap:rqfnac:v:42:y:2014:i:1:p:95-122
    DOI: 10.1007/s11156-012-0335-7
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    References listed on IDEAS

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    Cited by:

    1. Afego, Pyemo N., 2017. "Effects of changes in stock index compositions: A literature survey," International Review of Financial Analysis, Elsevier, vol. 52(C), pages 228-239.
    2. 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.
    3. Javier Vidal-García & Marta Vidal & Duc Khuong Nguyen, 2016. "Do liquidity and idiosyncratic risk matter? Evidence from the European mutual fund market," Review of Quantitative Finance and Accounting, Springer, vol. 47(2), pages 213-247, August.
    4. Houdou Basse Mama & Stefan Mueller & Ulrich Pape, 2017. "What’s in the news? The ambiguity of the information content of index reconstitutions in Germany," Review of Quantitative Finance and Accounting, Springer, vol. 49(4), pages 1087-1119, November.
    5. 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.

    More about this item

    Keywords

    Event study; FTSE SmallCap index; Index changes; Institutional ownership; Liquidity; Stock prices; Trading volume; G12; G14;

    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

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