Impacts of equity index reconstitution on stock returns.
Tan, Joshua Guang Liang.
Toh, Pei Yun.
Date of Issue2008
College of Business (Nanyang Business School)
This study examines the impact of reconstitution of the Straits Times Index from January 1999 to August 2007. Throughout the period analyzed, there were a total of 50 stocks added to and 57 stocks deleted from the index. From our study, we find that the stock market reacts positively to the announcement of the addition and negatively to the deletion. The overall price effects of the constituents are permanent after announcement day as divergence of cumulative returns are found between additions to and deletions from the index. However, unlike past studies on the S&P 500, we do not find any market reaction to the addition and deletion on the dates the index reconstitutions become effective. The results obtained from the periodic and effective day analysis do not show any significant impacts and, therefore, do not support the hypothesis of downward sloping demand curve for stocks.
Final Year Project (FYP)
Nanyang Technological University