Investing in the Presence of Massive Flows: The Case of MSCI Country Reclassifications

24 Pages Posted: 11 May 2017 Last revised: 24 Jun 2017

See all articles by Terence Burnham

Terence Burnham

Chapman University - Department of Business and Economics; Chapman University The George L. Argyros School of Business & Economics

Harry Gakidis

Acadian Asset Management

Jeffrey Wurgler

NYU Stern School of Business; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: June 20, 2017

Abstract

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

Burnham, Terence C. and Gakidis, Harry and Wurgler, Jeffrey A., Investing in the Presence of Massive Flows: The Case of MSCI Country Reclassifications (June 20, 2017). NYU Working Paper No. 2451/38626. Available at SSRN: https://ssrn.com/abstract=2966045

Terence C. Burnham

Chapman University - Department of Business and Economics ( email )

Orange, CA
United States

Chapman University The George L. Argyros School of Business & Economics ( email )

333 N. Glassell
Orange, CA 92866
United States

Harry Gakidis (Contact Author)

Acadian Asset Management

260 Franklin Street
Boston, MA 02110
United States

Jeffrey A. Wurgler

NYU Stern School of Business ( email )

Stern School of Business
44 West 4th Street, Suite 9-190
New York, NY 10012-1126
United States
212-998-0367 (Phone)
212-995-4233 (Fax)

HOME PAGE: http://www.stern.nyu.edu/~jwurgler/

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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