Stock Price Effects Associated with Index Replacements in Germany

27 Pages Posted: 23 Mar 2001

See all articles by Claus Deininger

Claus Deininger

University of Würzburg - Business Administration & Economics

Christoph Kaserer

Technische Universität München (TUM)

Stephanie Roos

University of Würzburg - Business Administration & Economics

Date Written: March 20, 2000

Abstract

The presented paper addresses the question whether there is a stock price reaction to index replacements on the German stock market. Although it is well known from the empirical literature, which is predominantly related to the US stock market, that an index replacement has a strong impact on stock prices, it is still an open question, whether this stock price adjustment is only transitory or persistent.

In order to shed new light on this issue, this paper analysed inclusions into and deletions from the two most important German stock indexes, namely the blue-chip index DAX and the mid-cap index MDAX. Unfortunately, also our evidence seems to be rather mixed with respect to the above mentioned hypotheses. We found a strong abnormal price impact on the day of the announcement of the index replacement. Stocks included in the index rose by 1.72 percent on the announcement date, while stocks deleted form the index fall by 1.19 percent on that day and by a further significant 8.76 percent up to the replacement day. Both reactions were statistically significant and they seem to be persistent, as we found no indication for a reversion in the stock price movement during the following weeks. This evidence does not fit into the price pressure hypothesis. The same is true for our finding that although absolute price reactions on the announcement date are very similar for both type of index replacements abnormal trading volume reactions are larger and more significant for index inclusions. We also found some evidence against the liquidity hypothesis. Especially, an index replacement seems not to have an impact on stock price volatility and price reactions on the announcement date are not correlated with long run volume reactions. Therefore, our evidence may support the imperfect substitute hypothesis, although we found a weakly significant correlation of price and volume reactions on the announcement date only for inclusions. Of course, the economically interesting question remains why investors and fund managers are willing to pay a premium for stocks included in an index.

JEL Classification: G11, G12, G14

Suggested Citation

Deininger, Claus G. and Kaserer, Christoph and Roos, Stephanie, Stock Price Effects Associated with Index Replacements in Germany (March 20, 2000). EFMA 2001 Lugano Meetings. Available at SSRN: https://ssrn.com/abstract=264570 or http://dx.doi.org/10.2139/ssrn.264570

Claus G. Deininger

University of Würzburg - Business Administration & Economics

Sanderring 2
Wuerzburg, D-97070
Germany

Christoph Kaserer (Contact Author)

Technische Universität München (TUM) ( email )

Arcisstr. 21
Munich, D-80290
Germany
+49 89 289 25489 (Phone)
+49 89 289 25488 (Fax)

HOME PAGE: http://www.cefs.de

Stephanie Roos

University of Würzburg - Business Administration & Economics ( email )

Sanderring 2
Wuerzburg, D-97070
Germany
(0931) 31-2932 (Phone)
(0931) 31-2582 (Fax)

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