An Analysis Of The Index Effect Of Shanghai And Shenzhen 300 And Its Causes

The topic of this article is the effect of index change. As has been researched by many scholars, when a stock is added into a stock index, its price and trading volume will experience an abnormal fluctuation. However, the source and the reason of the phenomenon is still controversial. While domestic researchers still use some traditional way to handle this problem, it is relatively lack of innovation.So in the article, we try to look into this topic in a new angle on the shoulders of previous research by introducing reference system to measure the abnormal return. Empirical study is as follows:the HS300index turns out to be the same by using traditional method; however, in reference system, the results seem to be asymmetry. Only stocks that are added into index exhibit abnormal return while the deleted stocks’ results are not significant. The reason may lay on the existence of monitoring cost, signaling transduction and liquidity effects. For stocks that are added into index for more than once, the results are neither strong nor significant indicating the existence of monitoring cost because the stocks added into index can reduce monitoring cost while the deleted stocks can’t. Further study shows that the effect of index change also exists in index that is not tracked by index fund which shows the additional demand from index fund is not the only reason of this effect. Finally, the liquidity hypothesis is examined showing both the added stocks and deleted stocks share a permanent improvement of liquidity, which is partially correspond with liquidity hypothesis.