Abstract
Events that directly affect stock indices are of considerable importance to various index instruments such as ETFs and index funds. One of the most important of such events involves updating the index, which takes place once or twice per year. The effect this has on the capital markets is known as the “index effect”, and it is one of the strongest and most influential long-term effects. Using two different methods, I examine how the index effect impacts the Israeli capital markets. I examine the three leading market indices—the Tel-Aviv 25, the Tel-Aviv 75, and the Tel-Tech 15—for firms whose stocks enter and exit their respective index for both daily and intraday data. In the first examination, I divide the sample based on firms entering/exiting each of these three market indices and examine the index effect using daily data. This analysis shows that the market responds differently for firms entering and exiting the Tel-Aviv 25 than it does for the two other indices. For the second examination, the sample is divided based on each stock’s volatility during the period prior to the event using intraday data. This analysis shows that more volatile stocks respond more strongly to the indexing event.
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Notes
TA25—The TASE’s flagship index. It was first published in 1992 under the name “MAOF Index”. It tracks the prices of the shares of the 25 companies with the highest market capitalization on the exchange.
TA75—This index tracks the 75 shares with the highest market capitalization not included in the TA25 index. TEL-TECH15—The TASE’s leading technology index.
TFM is used instead of the classic market model because it improves the t statistic, reducing the variance of the residuals and increasing the power of tests based on those residuals.
From day–300 to day–30.
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I thank the anonymous referee for helpful comments.
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Appendix A
Appendix A
1.1 A.1 Estimation results of the benchmark model for entering stocks by type of index
In this section, I use the results from the market model as a benchmark to investigate the market efficiency for the index effect. As noted in Sect. 4.2.1, the sample contains 154 firms that entered the index. Group 1 contains 24 firms entering the TA25, group 2 contains 108 firms entering the TA75, and group 3 contains 22 firms entering the TEL-TECH15. The entering firms and their performance are shown in Table 9.
As mentioned above, the results for entering firms are similar regardless of whether it is the market model or the TFM that is used. From Table 9 we find that gains due to information leaks (regarding the entering announcements) exist for the TA75 and the TEL-TECH15 groups. These leaks begin as early as 30 days prior to the event and persist even during the period following the event (supporting the investor awareness hypothesis). The TA25 group, however, experiences information leaks that are offset entirely, starting 11 days prior to the event (supporting the price pressure hypothesis). The main reason for the difference between the indices is the size of the firms traded in them. The TA75 and the TEL-TECH15 indices represent smaller firms and so are more volatile and sensitive to price changes than ones in the more stable TA25.
1.2 A.2 Estimation results of the benchmark model for exiting stocks by type of index
In this section, I use the results from the market model as a benchmark to investigate market efficiency for the index effect. As noted in Sect. 4.2.2, the sample contains 151 firms exiting the index. Group 1 contains 26 firms exiting the TA25 index, group 2 contains 101 firms exiting the TA75, and group 3 contains 24 firms exiting the TEL-TECH15. The exiting firms and their performance are set out in Table 10.
Again, the results for exiting firms are similar regardless of whether it is the market model or the TFM that is used. Table 10 shows that losses due to information leaks (regarding the exiting announcements) exist for the TA75 and the TEL-TECH15 groups, extending from 30 days before the event to up to 5 days after it (supporting different economic hypotheses). The TA25 group, however, does not experience the index effect for this period. A possible explanation is that most firms that exit the TA25 end up entering the TA75, an index belonging to the TA100, considered by most to be the Israeli market index, such that any effects of exiting one index are offset by entering another. The increase for both the TA75 and the TEL-TECH15 during the 25 days following the announcement results from the negative abnormal returns in the period before the event. These returns are explained by the price pressure hypothesis and can be attributed to the operations of mutual funds and ETFs around the indexing event.
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Tavor, T. Abnormal investor response to the index effect for daily and intraday data. Financ Mark Portf Manag 28, 281–303 (2014). https://doi.org/10.1007/s11408-014-0234-0
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DOI: https://doi.org/10.1007/s11408-014-0234-0