Working Paper: NBER ID: w23557
Authors: Terence C. Burnham; Harry Gakidis; Jeffrey Wurgler
Abstract: Almost $10 trillion is benchmarked to Morgan Stanley Capital International’s Developed, Emerging, Frontier, and standalone market indexes. Reclassifications from one index to another require thousands of investors to decide how to react. We study a comprehensive sample of past reclassifications to inform this decision. On average, reclassified markets’ prices substantially overshoot between the announcement and effective dates—prices fall when a market moves from an index with more benchmarked ownership to one with less, such from Emerging to Frontier, and vice-versa—but largely revert within a year. We identify alpha-maximizing responses to reclassifications for both benchmarked and more flexible investors.
Keywords: No keywords provided
JEL Codes: G11; G12; G14
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Market reclassification (from more benchmarked to less benchmarked) (G18) | Price decline (D44) |
| Price decline (D44) | Price reversion (P22) |
| Market reclassification (to more benchmarked) (G18) | Price increase (D49) |
| Price increase (D49) | Total return (G19) |