NSE Study: Price and Volume Effects of Nifty-50 Reorganizations
There couldn’t be a better way to wrap up the recent set of posts on the effect of stock inclusion/exclusion into the Nifty-50 index - it seems that the National Stock Exchange (NSE) itself published a research paper on this topic! Titled “Price and Volume Effects of S & P CNX Nifty Index Reorganizations” and authored by Dr. Srinivas Kumar, this is a much more detailed (and statistically rigorous) study than what I wrote about earlier.
Data (via NSE website):
- - Nifty & Junior Nifty inclusions and exclusions for the 1996-2003 period
- - The announcement dates were inferred from the date of the circular intimating the change
- - Sample size: 36 for Nifty, 62 for Junior Nifty
Methodology:
- - Announcement Window: 10th day prior to the announcement -> 10th day after the
announcement - - Implementation Window: 10th day prior to effective date -> 10th day after the change becomes effective
- - Compare actual return for each window with “normal returns”, for each stock
- - Normal return = Stock’s return if index inclusion/exclusion had not occurred
- - Both price & volume data anaylzed
Results:
- - Stock prices, on average, increase (decrease) significantly on the effective day of inclusion (exclusion) for the Nifty index
- - No such effects were observed for Jr. Nifty index
- - Stock prices revert after around a week’s time both for inclusions as well as for exclusions
- - No abnormal volumes for any event, on either index -> Price effect NOT supported by volume effect!
[For the statistically inclined, there's also detailed discussion of hypotheses, potential pitfalls, accuracy/errors, etc.]
Bottom Line: Weak support for a trading strategy that buys (sells) stocks that are included (excluded) in the Nifty-50 index (but NOT the Junior Nifty), and closes the trade within a week.
Related Posts: