The effect of index inclusion

Many empirical studies reveal that there is an index inclusion effect: a stock’s inclusion to an index is associated with significant abnormal returns. The effect of the index reviews in the Dutch market has been studied to a limited extent, in particular the differences in index inclusion effect between the large cap, mid cap and small cap indices of the Netherlands have never been studied before. This thesis investigates the index inclusion effect in the Dutch stock market. I found that, for the AEX inclusions an upward price movement of 5.64% is observed during the 50 days before the inclusion. This is followed by a full price reversal: the return on the inclusion day was -0.99% and during the 50 days after the event a cumulative abnormal return of -7.13% was found. The results of the AMX inclusions are in particular interesting, because in contrary to the findings for the AEX inclusions, the observed price changes lead to permanently higher stock prices. When examining the pre-inclusion period of 50 trading days, a strong positive excess return of 9.54% is observed. No reversal is observed during the 50 days after the event. Significant price patterns for index exclusions and AScX reviews were not found. The results are consistent with the trading behaviour of index funds and the anticipation of investors, but can also be linked to other several hypotheses.