The Anatomy of Index Rebalancings: Evidence from Transaction Data

Mariana Escobar, Lorenzo Pandolfi, Alvaro Enrique Pedraza Morales and Tomas Williams

No 9770, Policy Research Working Paper Series from The World Bank

Abstract: This paper exploits a novel dataset covering the universe of transactions in the Colombian Stock Exchange to analyze episodes of additions to and deletions from MSCI equity indexes. The analysis finds that additions and deletions have large price effects: the median cumulative abnormal return in absolute value is 5.5 percent. The paper shows that these price effects are due to large demand shocks by different classes of international investors—not only passive funds and ETFs, but also active mutual funds, pension funds and government funds—which are not absorbed by arbitrageurs. Consistent with recent asset pricing models with limits to arbitrage, stock demand curves are estimated to be very inelastic: the demand elasticity for the median stock in the sample is −0.34, implying that a 1 percent increase in the demand for the stock increases its price by 2.9 percent.

Keywords: International Trade and Trade Rules; Mutual Funds; Non Bank Financial Institutions; Capital Markets and Capital Flows; Capital Flows; Social Funds and Pensions; Financial Sector Policy (search for similar items in EconPapers)
Date: 2021-09-09
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Citations: View citations in EconPapers (2)

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Working Paper: The Anatomy of Index Rebalancings: Evidence from Transaction Data (2021)
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