Price and Volume Effects of NIFTY 50 Index Reorganization

Nifty 50 index comprises of largest, most liquid, and reputed 50 (51 from 2016) stocks listed on National Stock Exchange (NSE) India. During the index-composition changes, many stocks keep entering and exiting the benchmark index, and their impact is observed in the changes in the returns of a particular stock. We study the impact on price and volume traded of stocks being included and excluded from the Nifty fifty index during the year 2000 to 2016. We find evidence that stocks generate abnormal positive returns after index inclusion and they face abnormal negative returns after index exclusion. Further, abnormal returns get reversed for index included stocks in 60 days after the inclusion, while the excluded stocks yield negative returns only in the first ten days. Based on the event study analysis, the empirical findings show that after 60 to 240 days of exclusion, these stocks yield around 4% to 7% positive abnormal returns. Thus, there is an evidence of a short-term impact on the returns of stocks because of inclusion or exclusion from the benchmark index. Relevant policy implications are discussed.