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Anticipatory effects in the FTSE 100 index revisions

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  • Fernandes, Marcelo
  • Mergulhão, João de Mendonça

Abstract

This paper examines the price impact of trading due to expected changes in the FTSE 100 index composition. We focus on the latter index because it employs publicly-known objective criteria to determine membership and hence it provides a natural context to investigate anticipatory trading e ects. We propose a panel-regression event study that backs out these anticipatory e ects by looking at the price impact of the ex-ante proba-bility of changing index membership status. Our ndings reveal that anticipative trading explains about 40% and 23% of the cumulative abnormal returns of additions and deletions, respectively. We con rm these in-sample results out of sample by tracking the performance of a trading strategy that relies on the addition/deletion probability estimates. The perfor-mance is indeed very promising in that it entails an average daily excess return of 11 basis points over the FTSE 100 index.

Suggested Citation

  • Fernandes, Marcelo & Mergulhão, João de Mendonça, 2013. "Anticipatory effects in the FTSE 100 index revisions," Textos para discussão 345, FGV EESP - Escola de Economia de São Paulo, Fundação Getulio Vargas (Brazil).
    • Handle: RePEc:fgv:eesptd:345
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    Cited by:

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    3. Tseng, Yun-lan & Pan, Ging-ginq, 2024. "Do anticipated changes in the MSCI Taiwan index drive investor behavior?," International Review of Economics & Finance, Elsevier, vol. 92(C), pages 563-580.
    4. Gang Chu & John W. Goodell & Xiao Li & Yongjie Zhang, 2023. "Understanding short‐term price pressure from index reconstitutions: Evidence from the CSI 300," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 63(2), pages 2421-2440, June.
    5. Friedrich-Carl Franz, 2020. "Forecasting index changes in the German DAX family," Journal of Asset Management, Palgrave Macmillan, vol. 21(2), pages 135-153, March.

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    More about this item

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General

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