Price and trading volume reactions to index constitution changes : The Australian evidence

Abstract

Purpose

US studies show significant price effects when shares enter or leave an index during index revisions. Studies on other markets generally yield similar results with smaller price reactions. This study aims to examine the price effects resulting from revisions to the Australian S&P/ASX 100 and 300 indices.

Design/methodology/approach

The event study methodology is used to examine abnormal price and volume effects around the announcement dates and implementation dates of index revisions.

Findings

In contrast with studies on US index changes, this study shows no abnormal returns for additions to or deletions from the S&P/ASX 100 index and only a weak effect for the S&P/ASX 300, which showed a median abnormal return of  + 1.06 per cent on the implementation date for additions and −2.78 per cent for deletions.

Research limitations/implications

These results give a cautionary warning to those who wish to speculate on the changes to index constituents on the Australian market, or other similar markets where the strength of the index effect has not been clearly quantified.

Originality/value

This study adds to the body of knowledge on the index effect by providing Australian evidence.

Citation

Qiu, M. and Pinfold, J. (2008), "Price and trading volume reactions to index constitution changes : The Australian evidence", Managerial Finance, Vol. 34 No. 1, pp. 53-69. https://doi.org/10.1108/03074350810838226