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| Abstract |
One of the most contentious debates in the literature on index revisions is whether the price effects are permanent or transitory. This paper sheds light on this debate by providing empirical insights... into the interaction between information asymmetry risks, price patterns and trading volume behaviour around the revisions. Using data from the Nikkei 225 and liquidity as a proxy for information asymmetry, we find that price pressure effects for deleted (added) stocks with high (low) information asymmetry risks are substantially permanent (transitory), suggesting that the perceived higher information asymmetry risks for deleted stocks are priced. We further find that scheduled additions experience weaker price pressures that fully reverse within 15 days while non-scheduled additions experience stronger price pressures that, after 30 days, only partially reverse. Results overall highlight the important role an index's repertoire of rules can play in attenuating or exacerbating the persistence and magnitude of the price pressure effects around the revisions.show more
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