Market Reactions to Index Revisions: An Event Study of Price and Volume Reactions on the Oslo Stock Exchange Benchmark Index (OSEBX)

Abstract

This thesis examines the price and volume effects associated with semiannual revisions of the Oslo Stock Exchange Benchmark Index (OSEBX), focusing on their magnitude and causes. Using a quantitative event study methodology, 169 inclusions and 100 exclusions from 2003 to 2023 were analyzed for abnormal returns and trading volumes.
The findings reveal that, on average, companies included in the index experience a significant abnormal return of 2.45% the day before the new index constituents become effective, while excluded shares exhibit an abnormal return of -3.40%. The results suggest a near full reversion within the two weeks following the effective date. Additionally, significant abnormal returns of 0.77% for inclusions and -0.4% for exclusions were observed on the announcement day for the revised index constituents. Trading volume for both included and excluded shares increases significantly on the effective and announcement days, with a more pronounced increase on the day prior to the effective date. These volume effects are indicative of being temporary.
The study supports the price pressure hypothesis as the most probable explanation of observable index effects on OSEBX. The temporary price effects, combined with volume spikes around the effective date, suggest short-term market inefficiency from index funds adjusting their portfolios. Observed long-term abnormal returns are primarily attributed to the selection criteria hypothesis, which reflects over- or underperformance as factors leading to changes in index membership rather than the index effect explaining this long-term performance. Other hypotheses, such as the information, awareness, and liquidity hypotheses, receive less support or are rejected in this study.