The Empirical Analysis Of HS300 Index Effect

The index effect relates to the abnormal price effect and volume effect of the newly added stocks and removed stocks during and after index revisions. And the index effect, controversial to the efficient market theory, has attracted many scholars’and investors’attention over the past decades, and the hypotheses explaining this phenomenon has been well established in the foreign literature. There have been five hypotheses used to explain the price reaction, which can be categorized as Price Pressure Hypothesis, Liquidity Hypothesis, Downward-sloping Demand Curve Hypothesis, Information Content Hypothesis, and Segmented Market Hypothesis.In this study, the event study methodology is used to examine the price effect and volume effect of HS300. And this study documents significant but asymmetric price effect and volume effect of the additions and deletions:while there are significant permanent abnormal returns and significant permanent abnormal trading volumes for the inclusions, there is a price reverval for the exclusions, and even significant positive CARs in the long-term event window; the volume effect of the exclusions lags, and the magnitude of MVR also differs.The analysis of asymmetric index effect of HS300, in contrast to the standard financial theory, can shed a light on the efficiency of Chinese stock market and investor emotion and behavior in the case of index revisions. And this theoretic analysis can provide practical reference to the strategic response of index funds and individual investors.Thougth this study finds some evidence of temporary price pressure around the announcement date, which can be attributed to the tracking behavior of index funds, the long-term asymmetric index effect questions its validity. I use EPS forcasts, EPS forcasts errors and realized EPS as the information measures, and shareholders, institutional ownerships, analyst coverage and shadow cost as the investor recognition measures, coming to a conclusion that the Information Content Hypothesis and Segmented Market Hypothesis are possible explainations for the HS300 index effect. Further, I conduct regression analyses by combining all the associated factors, to observe a positive correlation between changes in EPS and abnormal returns, which means that the improved performance is the primary factor behind the CAR120, and the empirical evidence seems to be more consistent with an Information Content Hypothesis. Finally, taking the HS300 index effect and investor behavior into consideration, this sduty provide some suggestions to the strategic response for investors.