Investigating the Price and Volume Effect following Changes on OMX Nordic Indices
Sammanfattning: In the last decade, there has been a substantial shift from actively managed funds to funds with passive investment strategies. This shift was also observed by Shleifer (1986), who identified that passive investment funds began to significantly increase their ownership of the S&P 500 in the period between 1975 and 1983. As the ownership of the stock market increased as the number of index funds grew, researchers noticed that stocks experience positive (negative) abnormal returns following inclusions (exclusions) to (from) an index. The phenomenon is denoted the index effect and has been investigated by numerous scholars since the discovery. Different theories have been developed in order to explain the index effect. However, the causes of the effect are still under debate. The purpose of this research is to investigate the index effect on three Nordic stock indices; OMX Helsinki 25, OMX Copenhagen 20, and OMX Stockholm 30. There have been few extensive attempts at examining the index effect on Nordic stocks. Therefore, we aim to contribute to the existing field by investigating a longer period, and consequently by including more observations without deviating from the Nordic markets. An event study methodology has been utilized to test whether the stocks included (excluded) in (from) these indices generate positive (negative) abnormal returns. Furthermore, the existence of abnormal volume will be investigated. The sample consisted of 171 firms, over the period 1999 to 2018. Our findings reveal that no significant abnormal returns could be identified. However, large and significant abnormal trading volume was observed the day before the index recomposition. Given that abnormal trading volume possesses some explanatory power when it comes to the index effect, we were able to discover patterns that supported certain existing hypotheses. The results indicate that there is a minor positive (negative) price revision for included (excluded) stocks around the event date, followed by a reversion within five trading days, which supports the price pressure hypothesis. However, over a longer period after the event date, we observed that inclusions (exclusions) had a stable positive (negative) cumulative abnormal return. Over the same period, inclusions (exclusions) had increasing (decreasing) abnormal volume, which suggests that improved liquidity leads to price revisions that stabilize after the event.
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