Price Response to Factor Index Additions and Deletions
31 Pages Posted: 3 Oct 2016 Last revised: 11 Jan 2018
Date Written: October 3, 2016
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: Suggested Citation