Price and Volume Effects Associated with Index Revisions in the Leading Nordic Stock Indices

Mathias Christian Hviid J├Ânsson

Student thesis: Master thesis


This thesis examines the nature and causes of abnormal returns and trading volumes associated with changes in the composition of the four leading Nordic stock indices. The phenomenon has been widely discussed in the academic literature and is often described as the index effect. Different theories have been presented in order to explain index effects. However, discussions of the causes of index effects continue. Some scholars argue that increased demand by index funds may explain index effects, while others argue that the effects are caused by changes in information on companies affected by index revisions. Previously, only few attempts have been made to examine index effects in the Nordics. Therefore, this thesis investigates the effects of changes in the composition of the leading indices in Denmark, Norway, Sweden, and Finland for the period of 2001 to 2019. The commonalities and comparable transparent selection criteria between the four leading indices make a good case for a joint study across indices. The study employs an event study methodology inspired by Campbell et al. (1997) to estimate the price and volume effects in connection with index revisions. Moreover, in order to provide novel insights in the causes of index effects, the study includes a separate analysis of the relation between index revisions and the amount of company-specific information. The results provide evidence of significant index effects in some cases and show a development in the index effects over the past 20 years. In addition, the findings show a variation in index effects across the analysed indices which may be explained by the minor differences in selection criteria between the Nordic stock indices. The separate analysis of the link between index membership and companyspecific information shows that index membership does influence the amount of company-specific information. This suggests that changes in investor awareness and the amount of available information might be one explanation for index effects.

EducationsMSc in Finance and Accounting, (Graduate Programme) Final Thesis
Publication date2020
Number of pages106
SupervisorsKen L. Bechmann