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No. 773: Anticipatory Effects in the FTSE 100 Index Revisions

Marcelo Fernandes , Queen Mary University of London and Sao Paulo School of Economics, FGV
João Mergulhão , Sao Paulo School of Economics, FGV

December 20, 2015

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Abstract

This paper examines the price impact of trading due to expected changes in the FTSE 100 index composition, which employs publicly-known objective criteria to determine membership. Hence, it provides a natural context to investigate anticipatory trading effects. We propose a panel-regression event study that backs out these anticipatory effects by looking at the price impact of the ex-ante probability of changing index membership status. Our findings reveal that anticipative trading explains about 40% and 23% of the cumulative abnormal returns of additions and deletions, respectively. The results are both statistically and economically significant.

J.E.L classification codes: G12, G15, C14

Keywords:Imperfect substitutes, Index revision, Liquidity, Price pressure

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