Inclusion and exclusion of bonds from major indices are information-free, monthly events. At these events, liquidity providers get a significant abnormal return by trading against index trackers. The return is highest for bonds that are excluded because of a recent downgrade with a one-day return of 356.2 bps (T-stat 2.82). Liquidity provision at exclusions is more profitable than at inclusions because index trackers follow a sampling strategy and returns also increase when liquidity provision becomes more expensive. Furthermore, price reactions following index changes are reversed shortly after the event date which indicate temporary price pressure.

Publication information

Original languageEnglish
Place of Publicationwww
PublisherSSRN: Social Science Research Network
Number of pages38
StatePublished - 2012

    Research areas

  • Short-Term Reversals, Lehman/Barclay Bond Index, Liquidity Provision, Illiquid Market, TRACE

ID: 37839304