Market REsponse to the Composition Change of Islamic Index: Evidence from Indonesia

Many studies have investigated how markets react to the change of conventional market index composition. Nevertheless, how investors in emerging markets react to changes to an Islamic Index composition still needs to be answered. This study empirically investigates market responses to composition changes of an Islamic Index using Jakarta Islamic Index (JII) daily data. The study also investigates five conventional Indices on the Indonesian Stock Exchange, i.e. LQ45, Kompas 100, Bisnis 27, Sri Kehati, and Pefindo25, and compares the results with those of JII. The goal is to see whether difference between the two indices explain the market reaction. To measure market reaction, we calculate the abnormal return, relative abnormal volume, relative abnormal frequency, and relative abnormal bid-ask spread around the announcement of index composition change. Our finding shows the market reacts positively to stocks newly included in an Islamic index, which is in line with the reaction to stock added in conventional indices. Similarly, the market responds to the stocks excluded from JII and from conventional indices in the same way.