Price and volume effects associated with scheduled changes in constituents of index: study of NIFTY index in India

This paper examines price and liquidity effects associated with scheduled index reorganisation in NIFTY surrounding its announcement and effective days. The results show that there are no significant abnormal positive returns associated with index inclusion surrounding announcement day. Significant positive abnormal returns associated with inclusion are present on effective day but fails to sustain. Significant negative price effect associated with exclusion of stocks is observed through the announcement window and indicates that exclusion from index is treated as negative. Negative price effect is observed for exclusion closer to and on effective day but that also does not sustain. No significant and sustainable change in trading volume is associated with index reorganisation. Increase in volume associated with inclusion and exclusion of securities is found on effective day, which can be attributed to index funds and ETF activity. Results of this study offers evidence for price pressure and against liquidity hypothesis.