Work detail

An empirical study of impact of inclusion and exclusion from an Index on stock prices

Author: Bc. Karolína Vellechová
Year: 2021 - summer
Leaders: Mgr. Ing. Pavla Vozárová , Ph.D.
Consultants:
Work type: Bachelors
Language: English
Pages: 41
Awards and prizes:
Link:
Abstract: This thesis studies the effect of index components changes on the stock prices of added
and deleted components. Specifically, the thesis follows two market indexes from Western
Europe, CAC 40 and DAX 30, in the period from financial crisis in 2008 to 2020.
The theory of Efficient Market Hypothesis suggests that index components change
should not impact firm’s price, because the index membership is supposed to have no new
information, the findings of various researchers found out the opposite. There are several
hypotheses, which try to explain these effects. In this thesis three methods were used to estimate
the effect of addition and deletion, these were abnormal return, abnormal trading volume and
close open difference calculation.
The results obtained by all three methods were mostly consistent with the results of
previous studies of the US indexes. The calculation of abnormal volume reported significant
and expected results for both indexes, which suggested that the day before the change has the
highest abnormal volume. Also, the results for close open differences discovered expected
pattern, that the highest change happens usually on the day after announcement, which informs
about how fast investors reply to index change. The abnormal returns for the CAC 40 index
show expected significant positive abnormal return on day after announcement for addition
sample and negative for deletion sample. However, the results for the DAX 30 do not bring
statistically significant results.

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