FTSE 100 and FTSE 250 Quarterly Review – March 2015

After the close on 4 March 2015 the FTSE Group confimed the following changes to the FTSE 100 and FTSE 250 indices. The changes will be implemented at the close Friday, 20 March 2015 and take effect from the start of trading on Monday, 23 March 2015.

FTSE 100

Joining: Hikma Pharmaceuticals

Leaving: Tullow Oil

FTSE 250

Joining: AA, Imagination Technologies Group, Virgin Money Holdings

Leaving: Afren, Game Digital, Oxford Instruments

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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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Index changes (S&P 500) – paper review

The S&P 500 Index Effect describes the tendency for companies joining the S&P 500 Index to experience a positive and permanent impact on their share prices and betas.

Academic research on the topic has addressed:

  1. Whether the effect actually exists and, if it does, if the effect is symmetric (i.e. do companies leaving the index experience a fall in price and beta), and whether the effect is permanent.
  2. What causes the effect
  3. Are these S&P 500  index changes information-free events
  4. The effect on index funds

This article presents a brief review and listing of academic papers on the S&P 500 Index Effect.


1. Form of the effect

The following papers found that the share prices of companies joining the S&P 500 Index experienced positive abnormal returns and that this effect was permanent: Beneish and Whaley (1997), Beneish and Whaley (2002), Chen, Noronha and Singal (2004), Cai (2007), Kappou, Brooks and Ward (2008) and Hrazdil and Scott (2009).

While some found the effect on price only temporary: Harris and Gurel (1986), Lynch and Mendenhall (1997) and Pruitt and Wei (1989).

Some found the effect asymmetric, whereby prices did not fall for companies leaving the S&P 500: Chen, Noronha and Singal (2004) and Zhou (2011).

After inclusion in the index these papers found that comovement (beta) increased: Barberis, Shleifer and Wurgler (2005), Kasch and Sarkar (2011) and Kasch and Sarkar (2012).

2. Causes of the effect

Several possible causes for the effect have been proposed-

The excess demand is due to indexing in the presence of downward sloping demand curves: Shleifer (1986), Beneish and Whaley (1996), Lynch and Mendenhall (1997) and Wurgler and Zhuravskaya (2002).

The bid-ask spread decreases which results in improved liquidity: Hegde and McDermott (2003) and Erwin and Miller (1998) .

Investor awareness increases: Dhillon and Johnson (1991), Chen, Noronha and Singal (2004), Elliott, Van Ness, Walker and Wan (2006) and Xie (2013).

Analyst coverage increases: Kalok Chan and Hung Wan Kot and Gordon Y.N. Tang (2013).

Operating performance of the companies improves: Denis, McConnell, Ovtchinnikov and Yu (2003), Kalok Chan and Hung Wan Kot and Gordon Y.N. Tang (2013), Jain (1987) and Dhillon and Johnson (1991).

3. An information-free event?

The following found that inclusion in the S&P 500 Index was not an information-free event: Geppert, Ivanov and Karels (2011), Gygax and Otchere (2010), Cai (2007) and Denis, McConnell, Ovtchinnikov and Yu (2003).

4. The effect on index funds

The following papers looked at the effect of index changes on index funds: Madhavan and Ming (2002), Chen, Noronha and Singal (2006), Dunham and Simpson (2010), Kappou, Brooks and Ward (2010) and Green and Jame (2011).

INDEX (of papers listed below)

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

  1. Stock price response to S&P 500 index inclusions: Do options listings and options trading volume matter? [2013]
  2. A comprehensive long-term analysis of S&P 500 index additions and deletions [2013]
  3. Media coverage, analyst recommendation upgrade and information content of inclusions into S&P indexes [2013]
  4. Is There an S&P 500 Index Effect? [2012]
  5. An examination of the information content of S&P 500 index changes: Analysis of systematic risk [2011]
  6. Strategic trading by index funds and liquidity provision around S&P 500 index additions [2011]
  7. Comovement Revisited [2011]
  8. Asymmetric Changes in Stock Prices and Investor Recognition Around Revisions to the S&P 500 Index [2011]
  9. Do Index Fund Managers Trade Opportunistically Around Index Changes? An Empirical Examination of S&P 500 Index Funds [2010]
  10. Analysis of the probability of deletion of S&P 500 companies: Survival analysis and neural networks approach [2010]
  11. S&P 500 Index Inclusions and Analysts’ Forecast Optimism [2010]
  12. The S&P500 index effect reconsidered: Evidence from overnight and intraday stock price performance and volume [2010]
  13. Index composition changes and the cost of incumbency [2010]
  14. S&P 500 Index Revisited: Do Index Inclusion Announcements Convey Information about Firms’ Future Performance? [2009]
  15. The Effect of Demand on Stock Prices: Evidence from the S&P Index Float Adjustment [2008]
  16. A re-examination of the index effect: Gambling on additions to and deletions from the S&P 500′s ‘gold seal’ [2008]
  17. What’s in the News? Information Content of S&P 500 Additions [2007]
  18. What Drives the S&P 500 Inclusion Effect? An Analytical Survey [2006]
  19. Index Changes and Losses to Index Fund Investors [2006]
  20. The addition and deletion effects of the standard & poor’s 500 index and its dynamic evolvement from 1990 to 2002: demand curves, market efficiency, information, volume and return [2006]
  21. Comovement [2005]
  22. The Price Response to S&P 500 Index Additions and Deletions: Evidence of Asymmetry and a New Explanation [2004]
  23. The liquidity effects of revisions to the S&P 500 index: an empirical analysis [2003]
  24. Price Pressure on the NYSE and Nasdaq: Evidence from S&P 500 Index Changes [2003]
  25. S&P 500 Index Additions and Earnings Expectations [2003]
  26. S&P 500 Index Replacements [2002]
  27. The Hidden Costs of Index Rebalancing: A Case Study of the S&P 500 Composition Changes of July 19, 2002 [2002]
  28. Does Arbitrage Flatten Demand Curves for Stocks? [2002]
  29. Price Effects of Addition or Deletion from the Standard & Poor’s 500 Index: Evidence of Increasing Market Efficiency [2001]
  30. The liquidity effects associated with addition of a stock to the S&P 500 index: evidence from bid/ask spreads [1998]
  31. A Scorecard from the S&P Game [1997]
  32. New Evidence on Stock Price Effects Associated with Charges in the S&P 500 Index [1997]
  33. An Anatomy of the “S&P Game”: The Effects of Changing the Rules [1996]
  34. Changes in the Standard and Poor’s 500 List [1991]
  35. Institutional Ownership and Changes in the S&P 500 [1989]
  36. The Effect on Stock Price of Inclusion in or Exclusion from the S&P 500 [1987]
  37. Price and Volume Effects Associated with Changes in the S&P 500 List: New Evidence for the Existence of Price Pressures [1986]
  38. Do Demand Curves for Stocks Slope Down? [1986]
  39. Does Delisting from the S&P 500 Affect Stock Price? [1986]


Stock price response to S&P 500 index inclusions: Do options listings and options trading volume matter?
Authors [Year]: Yangyang Chen and Constantine Koutsantony and Cameron Truong and Madhu Veeraraghavan [2013]
Journal [Citations]: Journal of International Financial Markets, Institutions and Money, 23, pp379–401
Abstract: This study investigates the stock price response to Standard & Poor’s (S&P) 500 index inclusions during the period 1996–2010 and the role of options listings and options trading volume with regard to the information content of index inclusion announcements. Specifically, we address the following questions: (1) Is the magnitude of abnormal returns from the announcements of S&P 500 inclusions significantly lower for stocks with options listings? and (2) Is the magnitude of abnormal returns from the announcements of S&P 500 inclusions significantly lower for stocks with a high level of options trading volume? Our findings indicate that options listings themselves are not related to the magnitude of abnormal returns from the announcements of S&P 500 inclusions. We also find that greater levels of options trading volume do not convey private information about the S&P 500 index changes. We document that any measurable impact of options trading on the stock price response to S&P 500 inclusion announcements lies primarily in the level of abnormal options trading volume in the period immediately preceding the announcements.
Ref: AA645

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Index changes (FTSE indices) – paper review

Every quarter the constituents of the FTSE 100 Index are reviewed, some companies may be removed to be replaced by others. An effect has been observed whereby companies joining the FTSE 100 Index experience a positive and permanent impact on their share prices.

This article presents a brief review and listing of academic papers on changes made to FTSE indices.


Traders are interested in changes to equity indices due to the potential arbitrage profits; but academics have a wider interest because for them changes to indices act as something like a laboratory for testing theories of stock market efficiency and behavioural finance. Briefly, when a stock joins (or leaves) an index, nothing changes to the company itself and so (in an efficient market) there should be no change to the share price. Academics therefore get excited (the term is used here relatively loosely) when this is not the case.

Comovement

Kougoulis and Coakley (2004) found that shares joining the FTSE 100 Index experienced an increase in comovement (price movement correlation with other shares); shares leaving the index experienced the opposite effect. Mase (2008) supported the previous findings and in addition found that increases in comovement had become larger in recent years, and that the overall increase in comovement was due to new additions to the index rather than previous FTSE 100 constituents re-joining the index.

Price pressures

Another favourite of academics. If a share price moves without new information is the move temporary (price pressure hypothesis) or permanent (imperfect substitutes hypothesis)? Mazouz and Saadouni (2007) found strong evidence for the price pressure hypothesis: prices increased (decreased) gradually starting before the index change announcement date of inclusion (exclusion) and then reversed completely in less than two weeks after the index change date. The existence of the temporary price changes (price pressure hypothesis) was also found by Opong and Antonios Siganos (2013) and Biktimirov and Li (2014). Interestingly, Mase (2007) comments that the temporary prices changes to shares joining/leaving the FTSE 100 Index is in contrast to the case for S&P 500 index changes where permanent price changes have been found.

Information efficiency

Daya and Mazouz and Freeman (2012) (and other papers) found that informational efficiency improved for stocks added to the FTSE 100, but did not diminish after deletion.

Now, onto the more useful topics.

Price changes

Gregoriou and Ioannidis (2006) found that price and trading volumes of newly listed firms increased. That confirms what we already knew or suspected. But, interestingly, they (and other papers here) attribute the cause to information efficiency: stocks with more available information increase investor awareness. However, Mase (2007) does say that investor awareness and monitoring due to index membership do not explain the price effects. But not mentioned here is the influence of index funds.

And, finally, the interesting stuff.

Anticipatory trading

Fernandes and Mergulhao (2011) found that a trading strategy based on addition/deletion probability estimates gave an average daily excess return of 11 basis points over the FTSE 100 index. Opong and Siganos (2013) found “significant net profitability” from an investment strategy based on firms on the FTSE reserved list. And a strategy based on the FTSE 100 quarterly revisions was profitable if CFDs were used and traders could deal within the bid/ask spread.


INDEX (of papers listed below)

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

  1. Asymmetric stock price and liquidity responses to changes in the FTSE SmallCap index [2014]
  2. Compositional changes in the FTSE 100 index from the standpoint of an arbitrageur [2013]
  3. Information efficiency changes following FTSE 100 index revisions [2012]
  4. Anticipatory Effects in the FTSE 100 Index Revisions [2011]
  5. Comovement in the FTSE 100 Index [2008]
  6. The Impact of Changes in the FTSE 100 Index [2007]
  7. The price effects of FTSE 100 index revision: what drives the long-term abnormal return reversal? [2007]
  8. New evidence on the price and liquidity effects of the FTSE 100 index revisions [2007]
  9. Investor awareness and the long-term impact of FTSE 100 index redefinitions [2006]
  10. Information costs and liquidity effects from changes in the FTSE 100 list [2006]
  11. Comovement and Changes to the FTSE 100 Index [2004]


Asymmetric stock price and liquidity responses to changes in the FTSE SmallCap index
Authors [Year]: Ernest N. Biktimirov and Boya Li [2014]
Journal [Citations]: Review of Quantitative Finance and Accounting, 42(1), pp95-122
Abstract: We examine market reactions to changes in the FTSE SmallCap index membership, which are determined quarterly based on market capitalization and are free of information effects. Our main results are asymmetric price and liquidity responses between the firms that are shifted between FTSE indexes and the firms that are new to FTSE indexes. Firms promoted from a smaller-cap to a larger-cap FTSE index experience a permanent increase in stock price accompanied by improvements in liquidity. Similarly, firms demoted from a larger-cap to a smaller-cap FTSE index experience a permanent decrease in stock price accompanied by declines in liquidity. In contrast, firms added to the FTSE SmallCap index that were not previously in FTSE indexes show a transitory price gain and declines in liquidity. The results support the liquidity and price pressure hypotheses.
Ref: AA704

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FTSE 100 Index changes – effect on share price of companies leaving the index

FTSE 100 Index quarterly reviews

The following charts show the share price of six companies that have left the FTSE 100 Index (in the years 2012-2013). The time period for each chart is six months, starting from three months before the company left the index. The dashed vertical line shows the date it was announced the company was leaving the index.

So the charts show the share price behaviour in the three months leading up to leaving, and the three months after.

Review changes are implemented at close on the third Friday of the month of the review. (Further information on the FTSE 100 Index quarterly reviews.)

The effect is not as strong as that for companies joining the index, but generally share prices fall (sometimes quite steeply) in the three months leading up to the index change announcement, and then shares bounce back quite sharply immediately afterwards.

FTSE 100 Index change - company leaving index (LMI)
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FTSE 100 Index changes – effect on share price of companies joining the index

FTSE 100 Index quarterly reviews

The following charts show the share price of six companies that have joined the FTSE 100 Index (in the years 2012-2013). The time period for each chart is six months, starting from three months before the company joined the index. The dashed vertical line shows the date it was announced the company was joining the index.

So the charts show the share price behaviour in the three months leading up to joining, and the three months after.

Review changes are implemented at close on the third Friday of the month of the review. (Further information on the FTSE 100 Index quarterly reviews.)

It is quite common that share prices rise immediately before a company joins the FTSE 100 Index. While immediately afterwards the price is usually flat or falls back. This effect can be seen in the following charts.

FTSE 100 Index change - company joining index (CRDA)
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FTSE 100 quarterly review announcement date changes

The FTSE 100 quarterly reviews are implemented at the close on the third Friday of the four months: March, June, September and December.

The announcement date for the review changes used to be the Wednesday after the first Friday of the month.

From March 2014 this has changed: the announcement date is now 12 business days before the implementation date.

According to the LSE the change has been made to “provide clients a longer notice period to prepare for the trades involved following each review”.


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History of companies joining and leaving the FTSE 100 Index since 1984

To keep the FTSE 100 Index up to date and in accordance with its purpose, the constituents of the index are periodically reviewed. For example, companies can fall out of the index when their market capitalisation falls below a certain level, and they will be replaced by companies with a higher market cap. Changes can also be made as a result of M&A activity. Very roughly, following each review on average two companies leave the index and are replaced by two new ones.

The reviews take place in March, June, September and December. The reviews are implemented at the close of the third Friday of the month and take effect the following Monday. The review decisions are announced 12 business days before the implementation date. (Note: the date of announcements was changed from March 2014.)

The following table lists the entry and exit dates for each company that has joined or left the FTSE 100 Index since 1984. For example, if you want to know what years Jaguar was in the FTSE 100, this is where to look.

Note: Company names do change over time and therefore companies may appear more than once in the table. But care has been taken to minimise this as much as possible.

 


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FTSE 100 Index Quarterly Reviews – the effect on share prices when companies leave/join the index

To keep the FTSE 100 Index in accordance with its purpose, the constituents of the index are periodically reviewed.

The reviews take place on the Wednesday after the first Friday of the month in March, June, September and December. If any changes are to be made (i.e. companies ejected and introduced) these are announced sometime after the market has closed on the day of the review.

The action of leaving or joining the index can have a significant influence on the share price.

When companies leave the FTSE 100 Index

When companies leave the Index the share price often falls in the period immediately before the ejection and then rises afterwards.

This might be explained by index-tracking fund managers selling the company in anticipation of it leaving the index, and then the shares bouncing back after having been artificially oversold.

The following chart shows the impact on the share price of Alliance Trust when it left the FTSE 100 Index in March 2011.

Alliance Trust leaves the FTSE 100 Index

The index-leaving effect is not always as marked as that in the above case (for example, the price movements can be much shorter-term than was the case for Alliance Trust), but a similar reaction can be seen in many companies leaving the index.

 When companies join the FTSE 100 Index

When companies join the Index the share price often rises in the period immediately before joining and then is flat or falls back slightly afterwards.

This might be explained by index-tracking fund managers buying the company in anticipation of it joining the index.

The following chart shows the impact on the share price of ITV when it joined the FTSE 100 Index in March 2011.

ITV joins the FTSE 100 Index in March 2011

Again, as before, the index-joining effect is not always as marked as in the case for ITV, but a similar behaviour can be seen in many companies joining the index.

Further examples of the behaviour of share prices for companies leaving and joining the FTSE 100 Index can be seen in the Almanac.


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