Effects of Changes in Stock Index Compositions: A Literature Survey

41 Pages Posted: 5 Jul 2017 Last revised: 23 Oct 2017

Date Written: 2017

Abstract

The practice of periodically reconstituting equity indices suggests that changes to the composition of an index can impact the performance of firms whose stocks are added to or dropped from the index. This paper reviews and provides a comprehensive assessment of the academic literature on how changes in the composition of a stock index impacts prices, trading volume and other firm attributes. The review focuses on post-2000 contributions. It highlights and critically discusses major areas of controversy, disagreement and debate in both the empirical and methodological literature, and puts forth a promising agenda for future research. This is the first comprehensive survey of studies on the index effect and it should be particularly useful to portfolio managers and investors.

Keywords: Index effect, Abnormal returns, Trading volume, Literature review, Event study

JEL Classification: G10, G12, G14

Suggested Citation

Afego, Pyemo, Effects of Changes in Stock Index Compositions: A Literature Survey (2017). International Review of Financial Analysis, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2995839

Pyemo Afego (Contact Author)

University of Pretoria ( email )

South Africa

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