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Investing in the Presence of Massive Flows: The Case of MSCI Country Reclassifications

Authors: Gakidis, Harry
Burnham, Terence
Wurgler, Jeffrey
Keywords: MSCI;Index;Benchmark
Issue Date: 17-Jan-2017
Abstract: Approximately $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 guide this decision. 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 revert within a year. We identify alpha-maximizing responses to reclassifications for both tightly benchmarked and more flexible investors.
Appears in Collections:Finance Working Papers

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