Price Performance and Liquidity Effects of Index Additions and Deletions: Evidence from Chinese Equity Markets

Abstract

We investigate the impacts of index revisions on the return and liquidity of Chinese equities, using a sample of 69 stocks added to or deleted from the S&P/CITIC 300 index over the period October 2004-August 2007. Our findings show that stock prices respond positively to index additions, and negatively to index deletions. Furthermore, our study provides evidence in support of a long-term improvement in liquidity for both stock additions and stock deletions. Overall, the results are largely consistent with prior empirical findings, and also appear to be in line with the predictions of some behavioral finance models.

Keywords: Chinese equity market, index addition and deletion, event study,  abnormal returns, liquidity changes.

JEL Classifications: G14, G15