Forecasting Index Changes in the German DAX Family

Abstract

Combining market data with a publicly available monthly snapshot of Deutsche Börse's index ranking list, I create a model that predicts index changes in the DAX, MDAX, SDAX, and TecDAX from 2010 to 2019 before they are officially announced. Even though I empirically show that index changes are predictable, they still earn sizeable post-announcement one-day abnormal returns up to 1.42% and -1.54% for promotions and demotions, respectively. While abnormal returns are larger in smaller stocks, I find no evidence that they are related to funding constraints or additional risk for trading on wrong predictions. A trading strategy that trades according to my model yields an annualized sharpe ratio of 0.83 while being invested for just four days a year.

Keywords: index rebalancing, passive investment, index effect, index investing, trading strategy

JEL Classification: G12, G14