Study of Behaviour of Stock Prices before and Post Addition in Index in India

Abstract

When a stock is added to a major market index like NIFTY, it instantly attracts attention and trading interest from Index Funds, Exchange Traded Funds (ETFs) and other institutional investors. They add that particular stock to realign their portfolio with index for benchmarking purpose. This study investigates the index inclusion effect on the stocks in the Indian stock market. Researcher has found out that 69% of total stocks added in index since 2001-2017 have given positive returns one month prior to actual addition into index and 70% of total stocks have give positive returns one month post actual addition into index. On an average, stocks have given 4% and 6% return 1 month prior and 1 month post actual addition into index respectively. The results are consistent with the trading behavior of Index Funds, ETF's and other institutional investors.