Stock Index Futures and the Effect on Cash Market in Italy: Evidence from Changes in Indexes' Composition
23 Pages Posted: 2 Dec 2000
Date Written: June 2000
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: Suggested Citation