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Price and Volume Effects Associated with Changes in the Danish Blue-Chip Index: The KFX Index

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  • Ken L. Bechmann

    (Copenhagen Business School, Denmark)

Abstract

This paper considers the effects of changes in the composition of the Danish blue-chip KFX index for the period of 1989-2001. Consistent with the selection criterion used for the index, there is no evidence for a stock price effect at the announcement of a change in the index. However, deleted stocks experience an abnormal return averaging –13% in a six-month period before the deletion and a decrease in trading volume and efficiency of stock prices following the deletion. For added stocks, the average abnormal return is 8% and there is no significant change in trading volume or efficiency. These long-run effects are best explained by the imperfect substitutes hypothesis or the information costs/liquidity hypothesis, suggesting that stocks in the KFX Index are exposed to a higher demand or more attention and a lower cost of trading than stocks outside the index. However, the results do not rule out the possibility that part of the stock price effect is due to the selection criterion used for the KFX Index. All in all, this paper documents that the selection criterion for and the size of an index as well as the size of the related stock market are relevant when explaining the stock market effects of index revisions.ndex. All in all, this paper documents that the selection criterion for and the size of an index as well as the size of the related stock market are relevant when explaining the stock market effects of index revisions.

Suggested Citation

  • Ken L. Bechmann, 2004. "Price and Volume Effects Associated with Changes in the Danish Blue-Chip Index: The KFX Index," Multinational Finance Journal, Multinational Finance Journal, vol. 8(1-2), pages 3-34, March-Jun.
    • Handle: RePEc:mfj:journl:v:8:y:2004:i:1-2:p:3-34
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    References listed on IDEAS

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    Cited by:

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    3. Gavrilova Daria, 2023. "The Price Impact of S&P 500 Affiliation," Studia Universitatis Babeș-Bolyai Oeconomica, Sciendo, vol. 68(1), pages 42-61, April.
    4. Anne Pedersen & Alex Weissensteiner & Rolf Poulsen, 2013. "Financial planning for young households," Annals of Operations Research, Springer, vol. 205(1), pages 55-76, May.
    5. 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.
    6. 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.
    7. Joon Woo Park & Chang Won Lee, 2018. "Performance of stock price with changes in SRI governance index," Corporate Social Responsibility and Environmental Management, John Wiley & Sons, vol. 25(6), pages 1121-1129, November.
    8. Gang Chu & John W. Goodell & Xiao Li & Yongjie Zhang, 2023. "Understanding short‐term price pressure from index reconstitutions: Evidence from the CSI 300," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 63(2), pages 2421-2440, June.

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    More about this item

    Keywords

    index composition; selection criterion; price and liquidity effects;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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