Investing in the Presence of Massive Flows: The Case of MSCI Country Reclassifications
24 Pages Posted: 11 May 2017 Last revised: 24 Jun 2017
Date Written: June 20, 2017
Almost $10 trillion is benchmarked to Morgan Stanley Capital International’s Developed, Emerging, Frontier, and standalone market indexes. Reclassifications from one index to another require thousands of investors to decide how to react. We study a comprehensive sample of past reclassifications to inform this decision. On average, reclassified markets’ prices substantially overshoot between the announcement and effective dates—prices fall when a market moves from an index with more benchmarked ownership to one with less, such from Emerging to Frontier, and vice-versa—but largely revert within a year. We identify alpha-maximizing responses to reclassifications for both benchmarked and more flexible investors.
Keywords: MSCI, Index, Benchmark, Emerging, Frontier, Alpha
JEL Classification: G12, G14
Suggested Citation: Suggested Citation