An Empirical Research On The Index Effect In Chinese Stock Market

The index effect is defined as the abnormal market reflection of price and volume of the stocks being added into and deleted from an index as the index adjusts its sample stocks timely. In foreign countries, the index effect has been an important event for the research of not only the behavior mode of market participants, but also the problem of market efficiency. As the most representative indexes in domestic stock market is in developing, the research on index effect in China is still in a primary stage.This paper researches the index effect of the HS300 index, which is the first unified index of China. Executed event study method toward the dada of HS300 index sample stocks adjusting between June 2005 and December 2007, we confirm the existence and cause of the index effects of China. The empirical reach conclusions are as following: 1. The index effect of HS300 exists significantly, but the index change has different meaning for deleted and included stocks, thus the price effect for the two is asymmetric. The price effect of deleted stocks is 5 to 10 days later than the included stocks. In longer period, the price effect of included stocks is more significant than deleted stocks. Both are consistent with the Market Segment Hypothesis. 2. The trading volume of adjusted stocks increase before the announcements of index adjust are made, and the included stocks' trading volume increase earlier than the deleted stocks. In longer period, the trading volume of deleted stocks increase more than the included stocks. These results are also consistent with Market Segment Hypothesis.3.The cumulated abnormal return of the included stocks is positively related with the trading volume, which is consistent with the price pressure hypothesis. 4. When becoming a member company of HS300 index, the price effect of big companies is smaller than the small company. 5. The price effect is positively related to the net change of the number of investors of the stock. Thus, Market Segmentation Hypothesis is most suitable to explain the HS300 index effect.