JultikaUniversity of Oulu repository

Abstract

The goal of this thesis is to examine if, and to what extent, stock prices and trading volumes are affected by inclusions (exclusions) to (from) the following Nordic indices: OMX Helsinki 25, OMX Stockholm 30, OMX Copenhagen 25, and OMX Copenhagen 20. If observable effects are found, the research aims to examine whether the abnormal price and volume movements are temporary, or if they last over a longer period and whether they are symmetric between inclusions and exclusions. Finally, the thesis will discuss the hypotheses that could explain the findings.

To answer the research questions, relevant empirical evidence and suggested hypotheses are shortly compared and discussed. In addition, quantitative research is conducted using the event study methodology. The final sample of the study consists of 80 index inclusion and exclusion events in the Nordic indices between January 2009 and January 2020. The event study is implemented to determine whether abnormal returns or abnormal trading volumes occur around the events. Finally, conclusions are made.

The results of the thesis suggest that the index effect is evident in the Nordic indices (OMXH25, OMXS30, OMXC25, & OMXC20). However, the effect is rather negligible since no distinct abnormal return patterns are discovered around the index revision events, and only abnormal returns on individual days around the events are measured. In the short-term, temporary price and trading volume occurrences are found, suggesting heavy trading by index funds and investors especially before the changes become effective. Furthermore, the volume effects are found to be somewhat permanent and symmetric between included and excluded stocks indicating improved (impaired) liquidity for stocks that are included (excluded) to (from) the Nordic indices. Moreover, pre-announcement trading volume increase for index additions is observed, which can be explained with anticipatory trading or selection criteria hypothesis. Despite the long-term abnormal trading volume occurrence, no long-term return effects are found. This gives support to the efficient market hypothesis, since stock prices are relatively unaffected by the significantly abnormal trading volumes. The findings of the thesis support the price pressure and liquidity hypotheses. Additionally, the findings do not reject the selection criteria hypothesis, which may explain a part of the results.

While most of the literature on the index effect is conducted on the S&P 500 or other major indices, this thesis provides new insights into the phenomenon by studying the effects in the Nordic indices.