Anticipatory Effects in the FTSE 100 Index Revisions
30 Pages Posted: 16 Sep 2011
Date Written: September 15, 2011
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
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