The Index Effect: OMXS30 vs EURO STOXX 50
Sammanfattning: This paper examines the index effect, the phenomenon of abnormal returns and abnormal trading volumes that stocks may experience when included in or excluded from an index. Many theories have been presented to explain this phenomenon, relating it to factors such as demand shocks, increased attention and lower trading costs. At present, there is no consensus how the index effect is developing since it should be diminishing as markets become more effective, but should be increasing with the growth of index funds. It is obvious that index funds must reweight their portfolios along with index revisions which lead to changes in demand. However, it is not certain whether changes in demand should affect prices. This study examines the existence of index effects on the EURO STOXX 50 and the OMXS30 and relates the difference in findings to the underlying characteristics of the two indices. We find signs of abnormal returns and abnormal trading volumes for both indices short term but can conclude that a permanent effect only exists for the OMXS30. These findings are reasonable since the EURO STOXX 50 has more perfect substitutes and is more scrutinized which leaves less room for long term anomalies. Inclusions should not have a significant long term effect as demand curves are fairly elastic. However, inclusions to the OMXS30 introduce the stocks to a larger base of potential investors. Also, since stocks in this smaller market have less close substitutes, demand curves are more inelastic and increased demand drives prices.
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