Index effects: Evidence from Australia

This paper presents the findings of the first study of the index effects from changes in the composition of Australia’s tradeable benchmark index: the S&P/ASX 200. Prior to the introduction of the S&P/ASX200 changes to the composition of the market’s (then) benchmark index (the All Ordinaries Index) became evident before the formal announcement dates and the changes were made the following trading day. These announcement arrangements enabled profitable front-running trading. Along with the introduction of the new indices (including the S&P/ASX200) the arrangements for announcing changes to the composition of the index were changed to remove the opportunity for profitable frontrunning trading. While this objective was largely met for additions to the index the study found statistically significant evidence of price pressure between the announcement and implementation dates which were partially offset over the subsequent 20-day period. In relation to deletions the study found negative abnormal returns prior to announcement dates as well as between the announcement and implementation dates that were partially reversed over the subsequent 20-day period. The overall conclusion is that the event of changes in the composition of the S&P/ASX200 is on average associated with positive abnormal returns for additions and negative abnormal returns for deletions.