Anticipatory effects in the FTSE 100 index revisions

Marcelo Fernandes and João de Mendonça Mergulhão

No 345, Textos para discussão from FGV EESP - Escola de Economia de São Paulo, Fundação Getulio Vargas (Brazil)

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.

Date: 2013-12-09
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Related works:
Journal Article: Anticipatory effects in the FTSE 100 index revisions (2016)
Working Paper: Anticipatory Effects in the FTSE 100 Index Revisions (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:fgv:eesptd:345

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