Abnormal investor response to the index effect for daily and intraday data

Events that directly affect stock indices are of considerable importance to various index instruments such as ETFs and index funds. One of the most important of such events involves updating the index, which takes place once or twice per year. The effect this has on the capital markets is known as the “index effect”, and it is one of the strongest and most influential long-term effects. Using two different methods, I examine how the index effect impacts the Israeli capital markets. I examine the three leading market indices—the Tel-Aviv 25, the Tel-Aviv 75, and the Tel-Tech 15—for firms whose stocks enter and exit their respective index for both daily and intraday data. In the first examination, I divide the sample based on firms entering/exiting each of these three market indices and examine the index effect using daily data. This analysis shows that the market responds differently for firms entering and exiting the Tel-Aviv 25 than it does for the two other indices. For the second examination, the sample is divided based on each stock’s volatility during the period prior to the event using intraday data. This analysis shows that more volatile stocks respond more strongly to the indexing event. Copyright Swiss Society for Financial Market Research 2014