Title: An empirical study on index changes on the Indonesia Stock Exchange

Authors: Abdur Rafik; I. Wayan Nuka Lantara

Addresses: Faculty of Economics, Universitas Islam Indonesia, Jln. Condong Catur, Depok, Sleman, DI. Yogyakarta, 55283, Indonesia ' Faculty of Business and Economics, Universitas Gadjah Mada, Jln. Sosio Humaniora No. 01 Bulaksumur, Yogyakarta, 55281, Indonesia

Abstract: The presence of a positive (negative) price response to stock additions (deletions) to (from) an index has been getting attention owing to its deviation from the perfectly elastic demand curve of stocks. This study sheds light on this issue in the Indonesian context using various index categories. The results intriguingly differ from prior research in most developed countries that have confirmed a positive (negative) price response to stocks added (removed) to (from) an index. Price response patterns are even opposite, which are negative (positive) for some additions (deletions), and they seem to reject the prediction of information-based hypotheses. The positive (negative) price response to (added) deleted stocks is associated with (low) high liquidity, (low) high leverage, and (high) low growth opportunity. These results seem to confirm the advantage of value premium strategy in the Indonesian capital market.

Keywords: demand-based hypothesis; index changes; index rebalancing; index revisions; information-based hypothesis; price responses; price pressure hypothesis; stock additions; stock deletions; stock markets; Indonesia.

DOI: 10.1504/AAJFA.2016.077322

Afro-Asian Journal of Finance and Accounting, 2016 Vol.6 No.2, pp.87 - 118

Received: 17 Jul 2014
Accepted: 09 Nov 2015
Published online: 28 Jun 2016 *

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