The Good, the Bad and the Insignificant: A study of the price and volume reactions related to the index revisions on the Euronext markets

Sammanfattning: While the Efficient Market Hypothesis infers that the mere inclusion of a company to an index or exclusion from it should have no effect on the company's market valuation, significant effects have been discovered on various markets. Yet, no unified explanation for the index effects prevails even for the studies conducted on the same markets and an increasing amount of competing hypotheses are proposed to explain the phenomenon. This thesis investigates the price and volume effects related to the revisions of the Euronext market indices N100, AEX, BEL20, CAC40 and PSI20 during the period 2000-2011. The dummy variable approach to event study is used to estimate the price effects and the Mean Volume Ratios (MVR) approximate the changes in the trading volumes. We discover significant anticipatory trading prior to the effective inclusion that reverses during the following weeks both in terms of price and volume. The exclusion effects are more mixed, differing greatly between the markets and remaining mostly insignificant. The CAC40 inclusions and exclusions are found to behave in the opposite way to what is expected on the effective day of the reconstitution and N100 is the only index to produce significant permanent price effects for the stocks added to the index. We conclude with partial support for the Price Pressure Hypothesis and evidence against the Information Content Hypothesis on the investigated markets.