Price Response to Factor Index Additions and Deletions

31 Pages Posted: 3 Oct 2016 Last revised: 11 Jan 2018

See all articles by Joop Huij

Joop Huij

Erasmus University - Rotterdam School of Management; Robeco; Erasmus University Rotterdam (EUR) - Erasmus Research Institute of Management (ERIM)

Georgi Kyosev

Erasmus University Rotterdam (EUR), Rotterdam School of Management (RSM); Robeco Asset Management

Date Written: October 3, 2016

Abstract

Abnormal price reaction around S&P 500 index changes has been considered as strong evidence that long term demand for stocks is downward sloping. This notion, however, has recently lost popularity due to the evidence that new additions are accompanied with a contemporaneous change in future earnings expectations. In this study we show that factor index rebalancing is a true information free event. The cumulative abnormal return from announcement to effective day is 1.07% for new additions and -0.91% for new deletions and around two-thirds of this effect is permanent. We find a direct relationship between the magnitude of abnormal returns and the abnormal volume coming from index funds. The documented effect results in a direct loss to index fund investors of 16.5 bps per annum.

Keywords: demand curves, factor premiums, low volatility, MSCI Minimum Volatility index, abnormal returns, abnormal volume, earnings change

JEL Classification: G11, G12, G14

Suggested Citation

Huij, Joop and Kyosev, Georgi, Price Response to Factor Index Additions and Deletions (October 3, 2016). Available at SSRN: https://ssrn.com/abstract=2846982 or http://dx.doi.org/10.2139/ssrn.2846982

Joop Huij

Erasmus University - Rotterdam School of Management ( email )

P.O. Box 1738
Rotterdam, 3000 DR
Netherlands

HOME PAGE: http://www.rsm.nl/jhuij

Robeco

Rotterdam, 3014DA
Netherlands

HOME PAGE: http://www.robeco.com/

Erasmus University Rotterdam (EUR) - Erasmus Research Institute of Management (ERIM)

P.O. Box 1738
Rotterdam, 3000 DR
Netherlands

Georgi Kyosev (Contact Author)

Erasmus University Rotterdam (EUR), Rotterdam School of Management (RSM) ( email )

P.O. Box 1738
Room T08-21
3000 DR Rotterdam, 3000 DR
Netherlands

Robeco Asset Management ( email )

Rotterdam, 3011 AG
Netherlands

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