The MSCI-Canada index rebalancing and excess comovement

Major changes to the MSCI Canada Standard Country index were announced and implemented in May 2000. This rebalancing involved the addition of some 17 and deletion of 13 stocks and had the net effect of increasing the market capitalization by US$50 billions. We investigate the associated changes in stock return comovement around this event on the Toronto Stock Exchange, the third largest North American exchange. We find that the average beta of the added stocks increases by as much as a factor of 1.6 while the average R2 increases by up to 5%. Robustness tests indicate the results are not driven by nonsynchronous trading.