Stock Index changes (other indices) – paper review

Previously, we have reviewed the academic literature on index changes for the FTSE 100 and S&P 500 indices; here we present a brief review and listing of academic papers on other indices.

This article presents a brief review and listing of academic papers on stock index changes.

Generally, most of the papers found similar effects for companies added to or deleted from indices as has previously been reported for the S&P 500 and FTSE 100 indices. Namely, shares experience positive abnormal returns and increased trading volumes following the announcement of their addition to an index.

An exception was Beneish and Gardner (1995) who found that share prices and volumes were not affected for new DJIA companies (probably due to a lack of index funds associated with the DJIA) although shares saw big falls when deleted from the index.

Shankar and Miller (2006) found that shares experienced greater increases (declines) when companies were introduced (deleted) from the series of S&P indices, than those companies that just moved between S&P indices.

One of the greatest points of difference is whether the index change effects on shares are permanent or temporary. The papers finding the effects permanent were: Hacbedel (2007) with respect to the MSCIEM, and Liu (2011) for the Nikkei 225. While those finding the effects temporary were: Shankar and Miller (2006) for the S&P SmallCap 600 Index,  Chakrabarti, Huang, Jayaraman and Lee (2005) for the MSCI indices, and Biktimirov, Cowan and Jordan (2004) for the Russell 2000.

INDEX (of papers listed below)

[Papers listed in reverse date order; indicates major paper.]

  1. What Happens When a Stock is Added to the Nasdaq-100 Index? What Doesn’t Happen? [2014]
  2. Market reactions to changes in the Nasdaq 100 Index [2013]
  3. Regression Discontinuity and the Price Effects of Stock Market Indexing [2013]
  4. The price effects of index additions: A new explanation [2011]
  5. Does Inclusion in a Smaller S&P Index Create Value? [2010]
  6. Why Do Index Changes Have Price Effects? [2007]
  7. Market Reaction to Changes in the S&P SmallCap 600 Index [2006]
  8. Price and volume effects of changes in MSCI indices – nature and causes [2005]
  9. Do Demand Curves for Small Stocks Slope Down? [2004]
  10. Information Costs and Liquidity Effects from Changes in the Dow Jones Industrial Average List [1995]

What Happens When a Stock is Added to the Nasdaq-100 Index? What Doesn’t Happen?
Authors [Year]: Susana Yu, Gwendolyn P. Webb, Kishore Tandon [2014]
Journal [Citations]:
Abstract: Additions to the Nasdaq-100 Index are based primarily on market capitalization rather than on judgments about a firm’s stature in its industry. We analyze abnormal returns upon announcement that a stock will be added to the Nasdaq-100 Index in a multivariate analysis that incorporates several possible alternative factors. We find that only liquidity variables are significant, but that factors representing feedback effects on the firm’s operations and level of managerial effort are not. This evidence suggests that additions to the Nasdaq-100 Index are associated with liquidity benefits but not with certification effects of the type associated with additions to the S&P indexes.
Ref: BA006

Market reactions to changes in the Nasdaq 100 Index
Authors [Year]: Ernest N. Biktimirov and Yuanbin Xu [2013]
Journal [Citations]:
Abstract: We examine stock market reactions to changes in the Nasdaq 100 index. We find asymmetric price response accompanied by a significant increase in trading volume on the effective date. Firms added to the Nasdaq 100 Index experience significant increases ininstitutional ownership, the number of market makers, and the number of shareholders. In contrast, firms removed from the index show significant decreases in the number of institutional shareholders. Additions to the Nasdaq 100 Index also show significant increases in four liquidity measures, whereas deletions demonstrate significant decreases in two liquidity measures. These changes in liquidity are related to the abnormal return on the announcement day. Taken together, the results provide support for the liquidity hypothesis.
Ref: AA723

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Super Bowl Indicator

This coming Sunday is Super Bowl XLVIII.

One of the most famous market predictors in the U.S. is the Super Bowl Indicator. This holds that if the Super Bowl is won by a team from the old National Football League the stock market will end the year higher than it began, and if a team from the old American Football League wins then the market will end lower.


Well, it certainly sounds far-fetched that a game of mutant rugby could affect the economy and stock market. However, in 1990 two academics published a paper (Krueger and Kennedy, 1990) finding that the indicator was accurate 91% of the time.

And then in 2010 George Kester, a finance professor at Washington and Lee University, published a paper (Kester, 2010) with new research that found that the Super Bowl Indicator still worked (although its accuracy had fallen to 79%). Kester also calculated that a portfolio that switched between stocks and treasury bills governed by the Super Bowl Indicator would be worth twice that of a simple portfolio invested continuously in the S&P 500.

And the connection between American football and the UK stock market is…?

Seeing how closely correlated the U.S. and U.K. stock markets are, it might be interesting to see how the Super Bowl Indicator applies to the U.K. market.

The following chart shows the annual returns of the FTSE All Share index since 1967 (when the Super Bowl started). The Y-axis has been capped at +/- 50%, which truncates the bars for the years 1974 (-55%) and 1975 (+136%). The years for which the Super Bowl Indicator failed to accurately predict the direction of the market has been indicated with white bars in the chart.

FTSE All-Share annual returns as predicted by the super bowl [1967-2013]As one can see, the indicator got off to a great start in the years following 1967, but recently its record has been patchy. Overall, the indicator was accurate in 72% of years (only slightly less than its accuracy rate in the US).

Unfortunately a paper (Born and Acherqui, 2013) published last year has rather spoilt the fun. The authors found that the ability of the Super Bowl Indicator to forecast the market had reduced to almost zero in the years since publication of the Krueger and Kennedy paper in 1990.

Market around the time of the Super Bowl

The chart below shows the market behavior around the time of the Super Bowl; the bars represent the average daily returns in the FTSE All Share Index since 1967 for the three days before, and three days following, the Super Bowl (which always takes place on a Sunday).

FTSE All-Share average daily returns for the six days around the Super Bowl [1967-2013]The average daily returns in the index for all days since 1967 was 0.03%; we can see therefore that the market is abnormally weak two days before a Super Bowl and abnormally strong one day before it.



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Quantifying the relationship between news and trading volume and price


A recent academic paper finds evidence for a relationship between the volume of news mentions of certain stocks and the volume of trading size of price change in those stocks.


There have been quite a few papers on the relationship between news or information searching and market movements. But this paper, Quantifying the Relationship Between Financial News and the Stock Market, tries to measure the relationship.

To research this the authors, Merve Alanyali, Helen Susannah Moat and Tobias Preis, studied daily issues of the Financial Times for the period 2007-2012. (As a by-product of this analysis they found that 891,171 different words appeared in the FT over this period!)

They tracked mentions of the companies in the Dow Jones Industrial Index and the corresponding movements in volume and price for these companies on the NYSE for the same day and the following day.

They found evidence for a relationship between the number of mentions of a company on a day and both the volume of trading and size of price change for a company’s stock on the same day.

The following figure from the paper shows the ranking of DJIA companies according to the correlation between FT mentions and absolute movement in the stock price.

Source: Merve Alanyali, Helen Susannah Moat and Tobias PreisThe strongest correlation among the DJIA companies they found was for Bank of America.

The paper concludes with the qualification that their analyses do not allow them to draw strong conclusions about whether news influences the markets, or the markets influence the news; but they propose that movements in the news and movements in the markets may exert a mutual influence upon each other.


Alanyali, Merve and Moat, Helen Susannah and Preis, Tobias, Quantifying the Relationship Between Financial News and the Stock Market. Sci. Rep. 3, 3578; DOI:10.1038/srep03578 (2013)


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