Stock Index Futures and the Effect on Cash Market in Italy: Evidence from Changes in Indexes' Composition

23 Pages Posted: 2 Dec 2000

See all articles by Silvia Rigamonti

Silvia Rigamonti

Catholic University of Milan

Roberto Barontini

Scuola Superiore Sant'Anna di Pisa - Institute of Management

Date Written: June 2000

Abstract

We study the price and volume effects on a stock following a change in the composition of the Italian Stock Exchange indexes, i.e. an inclusion in or an exclusion from the Mib30, that ranks the top 30 stocks by capitalization and liquidity, and the Midex, that includes the subsequent 25 stocks. We observe a different reaction of the MIB30 stocks prior to and after the Midex creation. Prior to the Midex creation, stocks included into the Mib30 experience an abnormal return of 7% that reverses to normal levels in the following 3 weeks; deletions exhibit a significant excess return of -4.8% over the event window preceding the change, which is not offset in the following weeks. With the creation of the Midex, stocks included in the Mib30 show a persistent negative abnormal return, while excluded stocks exhibit a temporary price pressure. On the contrary, stocks included into the Midex experience a significant abnormal return of 11%, while deleted stocks exhibit an abnormal return of -6.6% (significant at 10% level). Both effects seem to persist. We exclude that the information hypothesis may explain our evidence, since revisions are based on public information; results seem consistent with the price pressure hypothesis and with the existence of a liquidity premium, that changes once a stock is included in (or excluded from) the indexes on which a future contract is actively traded.

Keywords: Stock index revisions, price and volume effect, price pressure

JEL Classification: G14, G12

Suggested Citation

Rigamonti, Silvia and Barontini, Roberto, Stock Index Futures and the Effect on Cash Market in Italy: Evidence from Changes in Indexes' Composition (June 2000). EFMA 2000 Athens. Available at SSRN: https://ssrn.com/abstract=248531 or http://dx.doi.org/10.2139/ssrn.248531

Silvia Rigamonti (Contact Author)

Catholic University of Milan ( email )

Via Necchi, 5
20123 Milano
Italy
+39 02 72342436 (Phone)
+39 02 72342766 (Fax)

Roberto Barontini

Scuola Superiore Sant'Anna di Pisa - Institute of Management ( email )

Piazza Martiri della Libertà, 24
Pisa, Pisa 56124
Italy
++39 050 883.111 (Phone)

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