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

Almost $10 trillion is benchmarked to MSCI’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 date and the effective date—prices fall when a market moves from an index with more benchmarked ownership to one with less (such as 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. Disclosure: The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research or Acadian Asset Management. The views expressed herein should not be considered investment advice and do not constitute or form part of any offer to issue or sell, or any solicitation of an offer to subscribe or to purchase, shares, units, or other interests in any particular investments. Editor’s Note This article was externally reviewed using our double-blind peer-review process. When the article was accepted for publication, the authors thanked the reviewers in their acknowledgments. Andrew L. Berkin and Joanne M. Hill were the reviewers for this article. Submitted 17 January 2017 Accepted 20 August 2017 by Stephen J. Brown