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The Index Effect: An Investigation of the Price, Volume and Trading Effects Surrounding Changes to the S & P Australian Indices

Daniel Pullen () and Gerard Gannon ()
Additional contact information
Daniel Pullen: University of Melbourne, http://www.ecom.unimelb.edu.au/
Gerard Gannon: Deakin University, http://www.deakin.edu.au/buslaw/aef/staff/profiles/gannon.php

No 2007_07, Accounting, Finance, Financial Planning and Insurance Series from Deakin University, Faculty of Business and Law, School of Accounting, Economics and Finance

Abstract: This paper examines the stock price and volume effects surrounding the announcement of constituent changes to the S&P/ASX 200 and four supplementary indices. Between April 2000 and December 2002 additions to (deletions from) the ASX 200 were associated with a significant price rise (fall) over the 10 day period following the market announcement of the change. Additions (deletions) also displayed a significant rise (fall) on the announcement date itself. These findings were corroborated by significant increases in trading volume over the same intervals, suggesting heavy trading activity by index funds in response to changes to the ASX 200. Following the implementation of these changes, both additions and deletions experienced a significant price reversion, supporting the price pressure hypothesis. In contrast, none of the supplementary indices displayed evidence of stock price or volume effects, thereby precluding the information and liquidity hypotheses as viable explanations for the findings of this research.

Keywords: Index change; price effect; volume effect; index fund; price pressure. (search for similar items in EconPapers)
JEL-codes: G14 (search for similar items in EconPapers)
Date: 2007-05-07
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