Market behavior around stock index revisions
Meriam BOUSSEMA*
Sandrine LARDIC** (corresponding author)
Abstract: The purpose of this paper is to investigate the price and volume reactions around stock index
revisions. This study uses CAC40 intraday data in the pre and post index revision periods comprised between
1992 and 2001. The impact of index additions or deletions can be interesting from a theoretical as well as from a
practical viewpoint. Firstly, the Price Pressure Hypothesis (PPH) can be tested against the Liquidity Cost
Hypothesis (LCH) and the Information Content Hypothesis (ICH). Finally, results of the study can help dealers
to choose the best moment to buy/sell concerned securities.
Key Words: purchasing-sale simulations, profiles of performance, MSCI Indices, CAC 40 index.
JEL Classification: C1, G14.
* Sinopia AM, mboussema@sinopia.fr
**
Sinopia AM et MODEM, slardic@sinopia.fr, lardic@u-paris10.fr, Sinopia AM, 66 rue de la Chaussée
d’Antin, 75009 Paris, France. Tel. : 01.53.32.51.03.
1
Market behavior around stock index revisions
Introduction
Analysis of the impact of index changes (additions or deletions), can be useful from a theoretical and
practical point of view. From a theoretical viewpoint, this analysis allows us to know the impact of a
particular event on the behavior of the prices and to identify the parameters generating changes in
prices (arrival of information, unbalances between supply and demand for the securities,….). From a
practical viewpoint, a better knowledge of the additions/deletions impact on returns can help
operators, especially portfolio managers not only to choose the time of their intervention, but also to
spot possible opportunities of purchases and sales of stocks. Most studies on the subject were carried
out with this double perspective. Almost all these studies found that additions/deletions affect the
prices and volumes of stocks concerned. However, the length and the causes of this effect were not
clearly identified.
Harris and Gurel (1986) suggested that index additions can exert a pressure on the prices, because of
an increase in the demand or supply in these securities, and thus generate a temporary variation of the
prices and volumes of transaction (price pressure hypothesis). If this effect fades out quickly, it means that
additions/deletions induce an abnormally high demand/supply (from institutional investors, for
example, wishing to replicate the index rather than acting on information they may have come by).
Harris and Gurel consider that the existence of an abnormal return is neither due to the arrival of
information, nor to a permanent change in the securities’ liquidity. They observed that any abnormal
return of the SP500 is completely gone after two weeks. Chung and Kryzanowski (1996) reached the
same conclusion for the Canadian index TSE300.
2
Amihud and Mendelson (1986) showed that an index revision is accompanied by a permanent
modification of prices and liquidity of the securities concerned (liquidity hypothesis). The authors
suggested that this phenomenon is due to the existence of a relation between returns and transaction
costs. The liquidity hypothesis asserts that since direct transaction costs affect return of securities, a
variation in the security liquidity is accompanied by a modification of the liquidity premium and the
security equilibrium value. Within this framework, an index revision should be accompanied by a
permanent variation of the level of the transaction costs and by a permanent change of the price level.
Lastly, Jain (1987) and Dhillon-Johnson (1991) noted a permanent change in the security prices
following its addition into / deletion from an index. They explained this phenomenon by the arrival of
information which generates a readjustment of the fundamental value of the stock (information content
hypothesis). Actually, this assumption can be accepted if the decision to include a security into / delete it
from an index is made on the basis of information and not on criteria of size and liquidity (stock
market capitalization or free float). The existence of a persistent abnormal return can be explained by
other phenomena, such as a better follow-up by the analysts (in the case of the additions) involving a
change in the company value. Moreover, Chung and Kryzanowski (1996) showed that the number of
analysts following securities admitted in the index TSE300 increases significantly after the entry.
Furthermore, no significant reduction in the number of analysts was noted when a security is dropped
from the index.
The information content hypothesis was tested by Thomas (1995) for CAC 40 index revisions. Analysing a
period of 190 days around the index revision and calculating abnormal returns, this author showed that
while additions into the index do not have any perceptible impact, the consequences of deletions from
the CAC 40 are more significant even if they weaken progressively. Thomas examined the stability of
this result by dividing its sample period in sub-periods and compared the averages of abnormal returns
between these different sub-periods. She has concluded that the announcement of a revision produces
a significant effect on security returns, the outgoing (entering) values being subject to an abnormal fall
(rise) in prices between the announcement and the event. However, once the event is carried out,
3
returns of the admitted securities, like those of the deleted securities, find a level statistically similar to
that of the period preceding the announcement. Therefore, the membership premium for being in the
CAC 40 index should be limited to the admission premium.
The aim of this article is twofold. Firstly, we will show new results confirming or invalidating the
different hypotheses stated above. Secondly, we will offer a framework which would help portfolio
managers to identify an optimal strategy of purchase/sale concerning the admitted/deleted from the
index. For this purpose, we use a sample of three indices : the MSCI US, the MSCI Europe and the
French blue chips index, the CAC 40. For the CAC 40 index, we use intra-day returns. Using intra-day
data enables us to refine the analysis and to detect the very moment when the effect of the admission
or the deletion is most marked. Moreover, using intra-day data makes it possible to have a large
number of observations and consequently, more robust results from a statistical point of view, even if,
because of the observation frequencies, the results should be also more disturbed.
The remainder of this paper will be divided as follows. In the first section, we will present the database
as well as the reprocessing carried out in order to make the data exploitable before detailing the
calculation of abnormal returns. In the second section, we will analyze the securities’ purchase/sale
strategy and determine the best periods to carry out these operations for the three indices selected. In
the third section, we will analyze the stability of optimal strategies using all possible purchase/sale
dates. In the fourth section, we will concentrate on intra-day data and examine the behavior of the
French star index during a revision period. This last analysis permits us in particular to stress the
importance of the choice of the times of interventions in the stock market during the day.
4
1. Database and abnormal returns
1.1 The sample
Our sample contains three indices: the MSCI US, the MSCI Europe and the CAC 40. For the MSCI
indices, we have used daily closing prices going from January 1997 to June 2001. We did not take into
account the December 2001 index revisions as it occurred due to purely technical reason1 and it was
well anticipated by the market operators long time before the event. For these MSCI indices, the
revisions occur quarterly (whereas the CAC40 index can be revised at any time). These quarterly
changes relate to a variable number of securities (between 0 and 40) and are carried out according to
several criteria.
As for the MSCI US index, after reprocessing, we retained 132 securities admitted into the index and
53 securities deleted from it over the period. For the MSCI Europe index, we retained 126 index
additions and 125 index deletions.
In the case of CAC40 index revisions, the securities added or deleted previous to 1992 were not
included in the study as little information was available regarding them. Furthermore, stocks added or
deleted after September 1999 were also disregarded as the market opening and closing hours were
modified. All data being intra-day, each observation relates to a specific day, hour, minute or second of
transaction. As some transactions occurred simultaneously, the data had to be reprocessed. When the
prices were not identical, we calculated a volume weighted average price (in general the price of
simultaneous transactions is identical). Then, the data were regularized every 10 minutes in order to be
able to calculate returns on an homogeneous time basis.
1.2 Calculation of abnormal returns
To analyze the price behavior before and after stock index revisions, we calculated abnormal returns of
securities concerned by the revision. A simple way of doing so is to estimate the market model over a
1
MSCI has changed its methodology, to increase the target market representation target of the MSCI Standard Equity Indices
from 60% of total market capitalization to 85% of free float-adjusted market capitalization within each industry group and
within each country.
5
"normal" period of time2 and to extract the residuals of the previous regression. For MSCI indexes, the
window chosen to estimate the market model covers a period of two years, ending 29 days prior to the
event. This length of the period ensures a good stability of the estimators. For the CAC 40 index, as
returns being calculated every 10 minutes, we have retained a shorter period of time (two months)
finishing 20 days before the event. The observation of the individual data enables us to draw some
conclusions specific to the securities under scrutiny and to detect some anomalies in the data3.
However, a more synthetic study was undertaken because of the discrepancy between abnormal
returns. Consequently, in this work, we consider only average behaviors of the admitted or deleted
securities for each index.
We place ourselves from the viewpoint of an investor who would seek to profit from an operation of
purchase/sale stocks concerned by the index revision. The question is at which moments should she
buy or sell its securities in order to maximize its performance?
2. Simulations of optimal purchase/sale strategies
The goal here is to find the best time for an investor to buy (resp. to sell) then to sell (resp. to buy) a
security admitted (resp. deleted) into (from) an index. First, we suppose that the investor buys at a
specific date a stock for 100$. Then, we calculate how much will he/she earn when selling at successive
dates. For each purchase date, we determine the corresponding optimal sale date. The sale date is
considered optimal when the profit is maximum. Thus, for an (arbitrary) given date of purchase, we
have two pieces of information : the optimal date to sell and the profit associated with this date.
We then move to the following date and renew the procedure. And so on … We finally obtain a series
of maximum values, for each possible purchase date of the sample. Let us take a concrete example.
2
3
A period before the event (addition or deletion).
To keep space, these results are not presented in the text. They are however available upon request.
6
The National Bank of Paris (BNP) entered into the CAC 40 index the 11/17/93. Its admission was
announced the 11/12/93( five days before the entry). Date 0 corresponds to the date of admission (see
figure 1). On the abscissa axis, the value "-15_36" corresponds to 15 trading days before the admission
date of the security in the index and to the 36th interval of time. In 1993, the opening of the stock
exchange was at 10H00, the interval 36 thus relates to the 10 minutes interval going from 16H00 to
16H10. The curve shows for each date (couple day_ interval) the maximum abnormal profit that the
investor will be able to obtain buying, at this date, for 100 dollars the security BNP.
106
announce
105
entry
104
103
102
101
100
99
98
97
96
DATE -14_27 -12_12 -11_30 -9_9
-8_29
-6_6
-5_25
-3_8
-2_33 0_14
1_32
3_30
5_10
6_28
8_4
9_22 10_40 12_16 13_34 15_11 16_30 18_7 19_29
Figure 1. BNP performances around its entry into the CAC 40 index
Figure 1 shows that it was optimal for an investor to buy BNP stocks for 100 $ before its admission in
the index, i.e. before the date 0. Suppose he/she decides to buy these stocks after this date, whatever
the sale date, he/she will clearly not be able to make a substantial profit (the curve remains close to the
value 100$). In addition, the maximum gain he/she can obtain corresponds to a purchase carried out 4
days before the admission (interval 37, value: 105.13). The curve of the figure 1 actually corresponds to
the superior envelope of gains for an investor intervening in the market between -15 days and +15
days around the BNP admission into the index. The optimal sale date was not reported in this figure.
Consequently, we added this information in figure 2. The missing information on this figure is the date
of the corresponding sale in order to obtain these maximum gains. Also, we added one second curve
7
(datemax) on the figure of the performances (cf figure 2), indicating the date of sale for each date of
purchase. It is optimal for the investor to sell the security at the date of entry (0_5) if he bought it 4
days before the entry in the index4.
Figure 2. BNP performances around its addition into the CAC 40 index
It appears in figure 2 that whatever the purchase date between 14 days before the admission and the
admission day, the curve corresponding to the maximum price is horizontal. The optimal date to sell
the stocks under scrutiny is the admission date. Note also that the optimal period of detention is very
short beyond the date of admission into the index, except rare cases.
Let us now return to the more general study of the index revisions. As previously, we consider an
investor interested by opportunities of gains related to securities admission (deletion) into (from) the
MSCI US index. Figures 3 and 4 show performances calculated as before.
4
The sale dates are also read on the abscissa axis.
8
104
102
100
98
96
94
30
28
26
24
22
20
18
16
14
12
10
8
6
4
2
0
-2
-4
-29 -26 -23 -20 -17 -14 -11 -8 -5 -2 1 4 7 10 13 16 19 22 25 28
buying date
102
MINDATE
MIN
100
98
performance
106
buying date
DATEMAX
MAX
performance
sale date
35
30
25
20
15
10
5
0
-5
-10
-15
-20
-25
-30
-35
96
94
92
90
88
-29 -26 -23 -20 -17 -14 -11 -8 -5 -2 1
4
7 10 13 16 19 22 25 28
sale date
Figure 3. Performances around admission into the
MSCI US index
Figure 4. Performances around deletion from the
MSCI US index
Figure 3 which corresponds to the basket of stocks entering into the MSCI US index is very easy to
interpret. It is interesting to buy stocks admitted into the index as soon as possible and to sell them
one day before the admission (date -1). After the admission, it is clearly not interesting to adopt a
purchase/sale strategy for the stocks concerned by the admission (the curve MAX has a typical stair
profile). On the other hand, figure 4 which is about securities deleted from MSCI US index is also
interpretable although the stair profile is less clear. This figure shows that it is profitable to sell stocks
concerned by deletion as soon as possible and to repurchase them the day before the deletion.
Moreover, from the announcement, the gain resulting from such a strategy decreases very quickly. As
in the case of the entries, the investor gains are null on average if he adopts a strategy of sale/purchase
as soon as the stock comes out of the index.
In order to examine the spatial stability of these results, the study is extended to the MSCI Europe
index revisions. Results appear on figures 5 and 6.
110
MAX
25
DATEMAX
25
102
10
100
5
98
96
94
92
90
5
0
-5
94
-5
Figure 5 – Stock performances around entry into
the MSCI Europe index
98
10
96
7 10 13 16 19 22 25 28
100
MIN
15
0
-29 -26 -23 -20 -17 -14 -11 -8 -5 -2 1 4
buying date
102
MINDATE
20
buying date
104
15
performance
106
20
sale date
30
108
88
86
84
-29 -26 -23 -20 -17 -14 -11 -8 -5 -2 1 4
sale date
7 10 13 16 19 22 25 28
Figure 6 – Stock performances around deletion
from the MSCI Europe index
The result is identical to that obtained for the American index revisions and appears even stronger in
the case of the deleted securities, as the typical “stair” form clearly appears for the European stock
9
performance
30
index (see the curve Max), indicating the absence of possibilities of gains resulting from a
purchase/sale strategy beyond the date of deletion. Figure 6 also shows that starting from the date of
announcement (9 trading days before the event), the gain derived from the purchase-sale of securities
decreases quickly. The “datemax” and “datemin” curves show clearly that the investor must reverse its
position the day before the index revision to maximize its performance.
Let us now observe the average behavior of the securities of the CAC 40 index. Figures 7 and 8
describe the evolution of performances.
sale date
16
14
12
10
8
6
4
106
104
102
100
98
2
0
-15.2 -13.3 -10.2 -7.2 -5.32 -2.17 1.2 3.32 6.17 9.2 11.32 14.17 17.2 19.32
buying date
Figure 7. Stock performances around the entry into
the CAC40 index
96
buying date
18
108
DATEMAX
MAX
performance
20
22
20
MINDATE
18
MIN
16
14
12
10
8
6
4
2
0
-2
-4
-15.2 -13.32-10.17 -7.2 -5.32 -2.17 1.2 3.32 6.17 9.2 11.32 14.17 17.2 19.32
sale date
Figure 8. Stock performances around the CAC40
index deletions
The data used here are more subjected to noises than MSCI data, as they are intra-day.
Furthermore, the dates of admission and/or deletions are relatively dispersed. Although the figures
7 and 8 are more difficult to interpret, we find a profile similar to that observed for the other
indices, namely a “stair” (for the “Datemax” and “Datemin” curves) and an optimum gain for a
strategy of selling/purchasing before the date of the event.
3. Generalization
Up to now, we observed only the optimal gains profiles of the investor. However, it is also crucial
to obtain information on the stability of these profiles. We saw that it is optimal for an investor in
MSCI US index to buy as soon as possible the stock entering into the index and to sell it 1 or 2 days
before the admission. Suppose a second investor who would sell his stocks 3 days before the
admission or 1 or 2 days after the admission: should s(he) expect a weak profit or even a loss or
10
101
100
99
98
97
96
95
94
93
92
91
performance
22
could s(he) expect a gain profile almost identical to that of the first investor? To answer this
question, one should study the stability of performances.
In order to study the stability of the performances, we determined the gains carried out by an
investor for a date of purchase (respectively of sale) unspecified between -29 and 29 days around
the admission (respectively the deletion) and selling (respectively repurchasing) the security at all
dates after. Figure 9 gives the result. In this figure as in all that follow, the third axis, namely the
performance axis shows the evolution of a portfolio bought 100 $.
120
100-120
100
80-100
60-80
80
40-60
20-40
Performance
60
0-20
40
20
-29
-22
A
y -28 0
-15
y -20
-8
y -12
-1
y -4
6
y4
Sale
Buy ing
13
y 12
20
y 20
y 28
27
Figure 9. Stock performances around their addition into the MSCI US (all possible dates of purchase and sale)
We chose to draw figure 9 in three dimensions in order to have in the same graph the profiles of
gains for all the possible dates of purchase and sale. By assumption, this profile is null for a sale
preceding the purchase (area labeled A in the figure). This is why performances fall abruptly. The
periods of purchase/sale during which it is possible to carry out a gain appear very clearly on this
figure: they correspond to the peaks on the surface (inside the circle). It is therefore necessary to
buy the security before the index revision and to sell it around the date of admission (- 2 days up to
+2/3 days). Outside these periods, the investor is almost assured to carry out a loss.
11
In order to more precisely locate the period during which it is more appropriate to intervene, we
have enlarged the highest zone by considering (arbitrary of course) a date of purchase between -29
and -6 days and a date of sale between -6 days and +29 days. Figure 10 reproduces the result. It
confirms the previous results, namely it is necessary to buy the admitted stock before the entry and
sell around the date of admission. Note a peak in performances 1 day before the event. Note also
an asymmetry around this peak: the investor can sell her(is) security 2 or 3 days after the admission
and still carry out an important gain, but if s(he) decides to sell it 2 or 3 days before the entry, it has
all the chances to carry out only a very weak or even a null gain. Finally, note that the edge
corresponding to the peak with the maximum gains is the curve we represented on figure 3 for a
date of purchase ranging between -29 and -6 days before the admission into the index.
105-110
100-105
95-100
90-95
85-90
80-85
Performance
-29
-24
-19
Buying
-14
-9
Sale
Figure 10. Stock performances around their addition into the MSCI US index
(buying between –29 and –6 days, selling at all possible dates )
Concerning the securities deleted from the MSCI US index (see figures 11 and 12), the
interpretation is more difficult, since the profiles of performances appear more unstable (as we
already noted concerning figure 4). Remind that on these areas, we seek the lowest values since we
adopt a strategy of sale followed by a repurchase of the outgoing security.
12
104
102-104
100-102
98-100
102
96-98
94-96
92-94
100
90-92
88-90
98
96
Performance
94
y -29
92
y -21
y -13
90
y -5
Buy ing
y3
88
y 11
y 19
y 27
Sale
Figure 11. Stock performances around their deletion from the MSCI US index (all dates of purchase and sale)
Figure 11 shows that to have a gain, the investor should sell the security as soon as possible.
Concerning the date of repurchase, figure 12 allows us to visualize it better. According to it, it is
optimal to repurchase the security at the date of its deletion from the index (or approximately 20
days after the deletion).
99-100
98-99
97-98
96-97
95-96
94-95
93-94
92-93
91-92
90-91
Performance
-9
-14
-19
Sale
-24
-29
Buying
Figure 12. MSCI USD index deletions (sale between –29 et –6 days and repurchasing at all dates)
13
We carried out a similar analysis for the additions/deletions about the MSCI Europe index. To
keep space, results similar to those commented here appear only in the appendix.
In fine, our analysis shows that in all the cases it is necessary to buy (resp. to sell) as soon as possible
and to sell (resp. to buy) the day before the addition (resp. deletion) or the very same day.
Performances seem stable around the optimal gain profiles. This stability is however more visible
for additions into the index than for deletions from the index. On the other hand, an investor who
would liquidate his position 2 or 3 days before the realization of the event would carry out only a
very weak or even a null gain.
Let turn now to the analysis of performances’ stability inside trading days. If it is now clear that an
investor may gain by buying a security admitted into an index as soon as possible and to sell it the
day before the admission or 1 to 2 days after, the question is: do performances vary according to
the time of investor’s interventions during the day? In other words, has an investor choosing to
intervene only at the closing hour for instance has more chance to gain than an investor who
systematically intervene at the opening ?
To deepen this question, the daily MSCI indexes data we use are closing prices. Concerning the
CAC40 index, as underlined before, abnormal returns are calculated on data recorded every ten
minutes. Since performances also exhibit a stair profile, we interpret this as a sign of stability inside
every trading day.
4. More on intraday data
In this section, we use a different perspective. Contrary to previous sections where the analysis is
conducted using successive intervals of a day (every 10 minutes of one day in the case of the CAC
40 index), we refer here to identical intervals of successive days (opening prices, closing prices, …).
We therefore use daily data observed at fixed times of trading days. Figures 13A to 13D give the
results. They refer to an investor who will invest 100 $ during the first ten minutes of a trading day
14
and sell her(is) securities only at opening prices of following days. We suppose here that her(is)
interventions occur only at opening prices. More precisely, each figure corresponds to a 10 minutes
interval. Thus, the interval " 2 " of the figure 13A corresponds to the series in the range 10H1010H20. We suppose the investor buy/sell securities only during these ten minutes between –15
days and + 20 days around the date of admission (date 0).
21
101.2
18
15
DATEMAX
101
MAX
100.8
100.6
12
100.4
9
100.2
6
100
99.8
3
99.6
0
99.4
-3
-6
99.2
-15.2
-10.2
-5.2
0.2
5.2
10.2
15.2
25
99
100.4
DATEMAX
20
100.3
MAX
15
10
5
0
-10
-15.4
-10.4
-5.4
0.4
5.4
10.4
15.4
100
99.8
99.6
99.4
-10.3
-5.3
0.3
5.3
10.3
15.3
100.4
18
MAX
100.3
100.2
100.1
12
10
99.9
8
99.8
6
99.6
100.2
DATEMAX
14
99.7
100.4
20
100.1
-20
100.6
22
16
-15
100.8
DATEMAX
MAX
-15.3
100.2
100
-5
22
20
18
16
14
12
10
8
6
4
2
0
-2
-4
100
99.9
4
99.8
2
0
99.7
-15.5
-10.5
-5.5
0.5
5.5
10.5
15.5
Figure 13A to 13D. Stock performances around their addition into the CAC40 index using opening prices.
NB: X-axis : buying date, left y-axis: sale date, right y-axis: performance
The analysis of performances over the first minutes of quotations does not show that a single
purchase/sale strategy dominates others (see figures 13A and 13B). Conversely, figures 14A to 14F,
corresponding to the last minutes of transactions (starting from interval 40), makes it possible to
highlight the fact that an optimal strategy consists in buying the security entering into the index as
soon as possible and selling it the day before the entry, or the day of the entry. Beyond this date,
the figures show clearly that any strategy of purchase-sale will get only weak profits if not losses.
15
22
20
18
16
14
12
10
8
6
4
2
0
-2
-4
-6
100.4
100.3
100.2
100.1
100
99.9
99.8
DATEMAX
MAX
99.7
99.6
-15_38
-10_38
-5_38
0_38
5_38
22
20
18
16
14
12
10
8
6
4
2
0
-2
-4
10_38
22
20
18
16
14
12
10
8
6
4
2
0
-2
-4
-6
-8
-10
-12
15_38
-15_39
100.8
DATEMAX
MAX
100.6
100.4
100.5
DATEMAX
MAX
100.4
100.3
100.2
100.1
100
99.9
99.8
99.7
99.6
-10_39
-5_39
0_39
5_39
10_39
15_39
22
102
20
101.5
18
16
DATEMAX
14
100.2
12
100
10
100.5
8
99.8
99.6
99.4
-15_40
-10_40
-5_40
0_40
5_40
10_40
15_40
22
18
100.6
16
100.4
14
100.2
12
10
100
8
99.8
6
4
99.6
2
0
99.4
-15_42
-10_42
-5_42
0_42
5_42
10_42
100
6
4
99.5
2
0
99
-15_41
100.8
DATEMAX
MAX
20
15_42
101
MAX
-10_41
-5_41
0_41
22
20
18
16
14
12
10
8
6
4
2
0
-2
-4
-15_43
5_41
10_41
15_41
101
DATEMAX
MAX
100.8
100.6
100.4
100.2
100
99.8
99.6
99.4
99.2
-10_43
-5_43
0_43
5_43
10_43
15_43
Figure 14A to 14F. Stock performances around their addition into the CAC 40 index using closing prices.
NB: X-axis : buying date, left y-axis: sale date, right y-axis: performance
As another example, figure 15 gives stock performances around their addition into the CAC 40
when we suppose that the representative investor intervene only in the midday. The result is not
very different from the one obtained with opening or closing prices even if the “stair” profile is
attenuated: even if it is possible to carry out significant performances well beyond the entry, the
investor is almost sure to carry out losses if he chooses to buy the stocks between the date of
admission into the index and six days afterwards.
16
DATEMAX
MAX
101.5
101
100.5
100
performance
sale date
102
22
20
18
16
14
12
10
8
6
4
2
0
-2
-4
99.5
99
98.5
-15.7 -12.11 -9.15 -6.19 -3.23 0.27 3.31 6.35
buying date
10.7 13.11 16.15 19.19
Figures 15. Stock performances around their addition into the CAC 40 index using midday prices.
From the viewpoint of the securities deleted from the CAC 40 index, the analysis of performances
"by range" makes it possible to obtain relatively strong conclusions. The first ranges do not seem
truly profitable if a purchase/sale strategy is based on them (see figure 16).
20.6
100
99.5
buying date
20.2
99
20
98.5
19.8
98
19.6
97.5
19.4
97
19.2
96.5
19
-15_2
performance
20.4
100.5
MINDATE
MIN
96
-11_2
-7_2
-3_2
1_2
5_2
sale date
9_2
13_2
17_2
Figure 16. Stock performances around their deletion from the CAC 40 index using ranges 1 to 6.
Note however that if we have a close look at performances over last minutes of quotations, we
observe a very marked and symmetrical dynamic with the cases of addition into the index. Thus, a
strategy consisting to maximize investor’s gains is to sell as soon as possible securities which will be
deleted from the index and to repurchase them between -2 days and the day of the event. Such a
strategy is very marked starting from the fortieth range as the figures 17 testify (intervals 40 to 44).
17
25
20
100.3
MINDATE
MIN
20
100.2
19.5
15
100.1
19
10
100
5
99.9
18
0
99.8
17.5
-5
99.7
17
-10
99.6
16.5
99.5
16
-15
-15_39
22
20
18
16
14
12
10
8
6
4
2
0
-2
-4
-15_41
-10_39
-5_39
0_39
5_39
10_39
-15_40
100.5
100
99.5
99
98.5
98
97.5
97
96.5
-10_41
-5_41
0_41
5_41
22
20
18
16
14
12
10
8
6
4
2
0
-2
-4
-6
-15_43
10_41
15_41
100
99.5
18.5
15_39
MINDATE
MIN
100.5
MINDATE
MIN
99
98.5
98
97.5
-10_40
22
20
18
16
14
12
10
8
6
4
2
0
-2
-4
-15_42
-5_40
0_40
5_40
10_40
15_40
100.6
100.4
MINDATE
MIN
100.2
100
99.8
99.6
99.4
99.2
99
98.8
98.6
98.4
-10_42
-5_42
0_42
5_42
10_42
15_42
101
MINDATE
MIN
100.5
100
99.5
99
98.5
98
97.5
97
-10_43
-5_43
0_43
5_43
10_43
15_43
96.5
Figures 17A to 17E. Stock performances around their deletion from the index using closing prices
NB: X-axis : sale date, left y-axis: buying date, right y-axis: performance
In addition, a strategy consisting to intervene either at the opening or at the closing leads to the
same profile of performances (see figure 18).
Figure 18. Stock performances around their deletion from the CAC 40 index using ranges 1 to 6 and 40 to 43.
Contrary to the index additions, for the deletions the «stair» does not arise over the period
excluding the first and last minutes of transactions of the day (see figure 19).
18
Figure 19. Stock performances around deletion from the CAC 40 index using ranges 7 to 39.
Conclusion
In terms of purchase-sale strategies, strong results come out from our study since we obtain similar
conclusions on the one hand for indices MSCI USD, MSCI Europe and for the CAC40 index and
on the other hand for the entries and the exits of the indices. Our study shows that in all the cases it
is necessary to buy (resp. to sell) as soon as possible and to sell (resp. to buy) the day before the
event or the very same day. In addition, the interventions must preferably take place during the last
minutes of transactions. Beyond the date of the event, such a strategy of purchase-sale is not
remunerative.
References
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Brown S. and J. Warner (1985), "Using Daily Stock Returns: The Case of Event Studies", Journal
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Campbell J., A. Lo and A. MacKinlay (1997), The Econometrics of Financial Markets, Princeton
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Cochran W.G. and G.M. Cox (1950), Experimental Designs, New-York: John Wiley & Sons, Inc.
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volumes”, stage report, SINOPIA Asset Management.
19
Dhillon U. and H. Johnson (1991), “Changes in the Standard and Poor’s list”, Journal of Business
64, 75-85.
Harris L. and E. Gurel (1986), “Price and volume effects associated with changes in the S&P 500
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Hasbrouck J. (1991), “Measuring the information content of stock trades”, Journal of Finance 46,
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Satterthwaite F.W. (1946), "An Approximate Distribution of Estimates of Variance
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20
Appendix
105-110
100-105
95-100
90-95
85-90
80-85
-29
Performance
-23
-17
-11
-5
1
7
Buy ing
13
19
25
Sale
Stock performances around addition into the MSCI Europe index (all dates)
105-110
100-105
95-100
90-95
85-90
Performance
-29
-25
-21
Buy ing
-17
-13
-9
Sale
Stock performances during addition into the MSCI Europe index (purchasing between –6 and –29
days and sale at all dates)
21
100-105
95-100
90-95
85-90
80-85
Performance
27
20
13
6
-1
Sale
-8
-15
-22
-29
Buy ing
Stock performances during deletion from the MSCI Europe index (all dates)
98-100
96-98
94-96
92-94
90-92
88-90
Performance
86-88
84-86
-9
-13
-17
Sale
-21
-25
-29
Buying
Stock performances during deletion from the MSCI Europe index (sale between –6 and –29 days and
repurchasing at all dates)
22