Anticipatory Effects in the FTSE 100 Index Revisions

30 Pages Posted: 16 Sep 2011

See all articles by Marcelo Fernandes

Marcelo Fernandes

Queen Mary University of London - Economics Department

Joao Mergulhao

Sao Paulo School of Economics-FGV

Date Written: September 15, 2011

Abstract

This paper examines the price impact of trading due to expected changes in the FTSE 100 index composition. We focus on the latter index because it employs publicly-known objective criteria to determine membership and hence it provides a natural context to investigate anticipatory trading effects. We propose a panel-regression event study that backs out these anticipatory effects by looking at the price impact of the ex-ante probability of changing index membership status. Our findings reveal that anticipative trading explains about 40\% and 23\% of the cumulative abnormal returns of additions and deletions, respectively. We confirm these in-sample results out of sample by tracking the performance of a trading strategy that relies on the addition/deletion probability estimates. The performance is indeed very promising in that it entails an average daily excess return of 11 basis points over the FTSE 100 index.

Keywords: additions, deletions, imperfect substitutes, index composition, liquidity, price pressure

JEL Classification: G12, G15, C14

Suggested Citation

Fernandes, Marcelo and Mergulhão, João, Anticipatory Effects in the FTSE 100 Index Revisions (September 15, 2011). Midwest Finance Association 2012 Annual Meetings Paper. Available at SSRN: https://ssrn.com/abstract=1927963 or http://dx.doi.org/10.2139/ssrn.1927963

Marcelo Fernandes

Queen Mary University of London - Economics Department ( email )

Mile End Road
London, E1 4NS
United Kingdom
+44 (0)20 7882 5082 (Phone)
+44 (0)20 8983 3580 (Fax)

João Mergulhão (Contact Author)

Sao Paulo School of Economics-FGV ( email )

Rua Itapeva 474
s.1202
São Paulo, São Paulo 01332-000
Brazil

HOME PAGE: http://eesp.fgv.br/professores/joao_mergulhao

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