Price and Volume Effects Associated with Index Revisions in the OSEBX

Svein Mæhle & Thomas Snefjellå Sandberg

Student thesis: Master thesis

Abstract

This thesis is an inquiry into the nature and causes of the index effect at the Oslo Stock Exchange Benchmark Index (OSEBX). Whether individual stocks experience abnormal returns upon entry into the U.S S & P 500 index has long been discussed in financial academic literature and is often referred to as the index effect. In the earliest studies, the results indicated that market frictions such as demand shocks caused by index funds are the most probable cause of the index effect at the S & P 500. However, more recent studies suggest that inclusion into the index has informational content, as well. Through a comprehensive analysis of index revisions at the OSEBX in the period from 2003 to 2013, our results shed new light on the index effect. An integral part of our analysis is the selection criterion of the index; this affects the research design and enables us to analyze stocks added to and removed from the index in the same manner. We employ event study methodology to analyze both price effects and trading volume associated with index revisions. The Fama-French three-factor model is used to calculate expected and abnormal returns. Our results provide strong evidence for the claim that the index revisions on the OSEBX is likely to be an information-free event caused by index funds’ excess supply and demand. These results are in violation of the efficient market hypothesis, as shareholder wealth is significantly affected without any new information being made accessible to the market. We reject the notion of improved liquidity related to index membership, but fail to reject the hypothesis of increased attention as being a partial cause of the index effect on the OSEBX.

EducationsMSc in Applied Economics and Finance, (Graduate Programme) Final Thesis
LanguageEnglish
Publication date2015
Number of pages146