RMIT University

Price Effects of Changes to Size Sub-indexes on the Australian Stock Exchange: An Event Study

Email address: david.sokulsky@rmit.edu.au

Keywords: Index Effect, Sub-Index, Abnormal Return

Abstract:
The purpose of this paper is to examine whether the general effect of index inclusion is present in relation to inclusion in the size sub-indexes on the Australian Stock Exchange. The three size sub-indexes that are considered are the ASX 20 leaders, ASX 50 leaders, and the ASX 100. A market model is used to calculate abnormal returns for both additions and deletions to these sub-indexes between January 1994 to December 1999. Results appear to show that positive abnormal returns can be made for additions in the 30 days prior to the announcement date, however cumulative abnormal returns for the next 90 days are negative. Results of deletions are not so clear however it is apparent that over the 120 day event window deletions show a positive CAR. In relation to the overall AOI, it appears that the index effect is stronger for the AOI as reported by Howard and Chan (1999), than it is for the sub-indexes examined here. This may be due to index fund managers being more concerned with reducing tracking error, and buying/selling stocks as they enter or leave the broad market index, instead of trying to reduce transaction costs. Attempting to reduce transaction costs could see managers holding one of the sub-indexes as a proxy for the AOI, and as such buying/selling stocks as changes to these indexes occur.

PDF file of paper: sokulsky.pdf

Session: Empirical Finance

Time: Sunday, 8 July, 2:15pm - 3:45pm

Room: B