Professional Investor

STATS.
TABLE 1: DIFFERENCES IN THE REVIEW PROCEDURES
S&P 500 S&P/TSX 60 Nikkei 225 FTSE 100 DAX 30
Predictability of additions Low Low Medium High High
Periodicity of review As needed As needed As needed + Annual with Annual with
annual quarterly quarterly
review review
Frequency of changes High Low Medium High Low
Source: Standard & Poor’s.
INDEX CHANGES PROCEDURES
Th e indices we study have diﬀ erent “The index effect may have fallen
index change procedures, and diﬀ erences
in the review frequency and the
transparency of eligibility rules serve as
victim to its own popularity”
important drivers of the index eﬀ ect.
Some follow a mechanistic and
predictable index change policy, while Table 1 highlights the diﬀ erences in AD+1. Th e results suggest that the
others are less predictable. Some the review procedures of the fi ve indices. announcements of additions to the S&P
announce changes a few days before the 500 and Nikkei 225 were reacted to as
eﬀ ective date, while others announce DATA AND METHODOLOGY new information, while the FTSE 100
changes several weeks before. To evaluate if a shift in the index eﬀ ect and DAX 30 additions were previously
has occurred, we divide our sample into anticipated. Th is is congruent to our
PROFILE – FACT BOX
two periods, both scrubbed to remove assumption that mechanistic index
additions associated with corporate changes are anticipated and refl ected in
actions such as mergers, acquisitions or prices prior to announcement.
corporate restructuring. Th e fi rst period
is from September 1998 to August SHRINKING INDEX EFFECTS?
2003. Th e second period is from We found the S&P 500, S&P/TSX 60,
September 2003 to August 2008. Nikkei 225 and DAX 30 exhibit
As is common in studies of the index diminishing excess returns between the
eﬀ ect, we do not use the absolute return announcement date and eﬀ ective date.
of the stock, but its excess return. Excess Th e most dramatic decline in excess
return is the diﬀ erence between the returns is exhibited by the Nikkei 225,
stock return and the return on the where the median excess returns from
relevant market, as represented by the AD (announcement day) to AD+1 (the
index. We also present medians rather day after the announcement day) fell
than means because of the diﬀ erences in from 5.97% to 1.16%. Th e DAX 30
sample sizes across diﬀ erent indices. index experienced the second highest
Figures 1, 2 and 3 show the median decline in excess returns from 7.85% to
Srikant Dash, CFA, FRM
excess returns of additions to S&P 500, -1.23%. However, the decline must be
Nikkei 225 and FTSE 100 respectively looked at in the context of the smaller
Career highlights:
over the two time periods. sample size.
Srikant Dash is vice president and
It is also interesting to note that in Th e median excess returns between
head of the global research and design
both sample time periods, the FTSE 100 AD & ED for S&P 500 additions
group at Standard & Poor’s Index
and DAX 30 announcements result in declined from 6.05% from September
Services.
no positive excess returns from AD to 1998 to August 2003 to 3.76% from
30 SUMMER 2009
29-3129-31 Shrinking indices.indd 30Shrinking indices.indd 30 1/6/091/6/09 11:52:2911:52:29Professional Investor Summer 09.32 32 4/6/09 15:40:57
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