Forecasting index changes in the German DAX family

Friedrich-Carl Franz ()
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Friedrich-Carl Franz: Goethe University Frankfurt

Journal of Asset Management, 2020, vol. 21, issue 2, No 5, 135-153

Abstract: Abstract Combining market data with a publicly available monthly snapshot of Deutsche Börse’s index ranking list, I create a model that predicts index changes in the DAX, MDAX, SDAX, and TecDAX from 2010 to 2019 before they are officially announced. Even though I empirically show that index changes are predictable, they still earn sizeable post-announcement 1-day abnormal returns up to 1.42% and − 1.54% for promotions and demotions, respectively. While abnormal returns are larger in smaller stocks, I find no evidence that they are related to funding constraints or additional risk for trading on wrong predictions. A trading strategy that trades according to my model yields an annualized Sharpe ratio of 0.83 while being invested for just 4 days a year.

Keywords: Index rebalancing; Passive investment; Index effect; Index investing; Trading strategy (search for similar items in EconPapers)
JEL-codes: G12 G14 (search for similar items in EconPapers)
Date: 2020
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DOI: 10.1057/s41260-020-00153-6

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