Independent thesis Advanced level (degree of Master (One Year)), 20 credits / 30 HE credits
Master thesis in Business Administration, School of Business and Economics at
Authors: Patrik Larsson and Pontus Gislén
Supervisor: Håkan Locking
Examiner: Sven-Olof Collin
Title: The index effect- a study on Nasdaq OMXS30 and OMXH25
Introduction: A significant part of the financial literature is based on the Efficient Market Hypothesis which assumes that prices in the market reflects all available information. Anomalies, such as the index effect, indicate weaknesses in this theory as it has been proved that it is possible to outperform the market using public information. Hence, the index effect can be linked to market efficiency which makes it interesting to study from a theoretical perspective. The mapping of the index effect is also interesting from a practical perspective, as it leads to a better understanding of whether investors and firms should take this anomaly into account.
Problem: Is there an index effect, how does it behave and what can explain this effect?
Purpose: The aim of this study is to investigate the index effect. This is to be able to draw conclusions about market efficiency and if investors and firms should take this anomaly into account. The index effect will be studied on OMXS30 and OMXH25 as these indices enables a price effect being traced to an index revision, separate from any new information being revealed.
Method: The research approach will be deductive in nature, where existing theories in the field are used to generate hypotheses. These are then tested quantitatively by an event study based on time series data for stocks on the basis of an index revision.
Conclusions: The results of this study shows an index effect for included stocks but not for excluded stocks. The index effect for included stocks can be distinguished from the end of the reference period. This is in line with what can be expected, since the criteria are designed so that a revision can be predicted. This effect is permanent and can be traced to an increased demand for stocks that are not perfect substitutes (Imperfect Substitute Hypothesis) and a greater awareness among investors (Awareness Hypothesis). Days after revision when the index effect already has reached its cumulative peak, there is a trend towards a reversal. This can be explained by that there exists a temporary price pressure associated with the revision (Price Pressure Hypothesis), in addition to a permanent effect. Finally, the index effect has decreased over time indicating that the market has become more efficient.
2014. , 73 p.