Price, Volume and Liquidity Fluctuations Around OBX Revisions - Evidence of Temporary Price Pressures and Index Effect Asymmetry

Abstract

This thesis seeks to isolate potential price, volume, and liquidity effects of revisions to the Oslo Børs Total Return Index (OBX). The research question is investigated using traditional event study methods. The market model is used to calculate normalized returns, whereas abnormal volume turnover is assessed using market-adjusted volume ratios. Additionally, bidask spreads are used to determine liquidity effects around index revisions. Through a comprehensive analysis of historical additions to and deletions from the OBX, findings point to significant temporary abnormal price pressures, most likely caused by index fund rebalancing, around the semi-annual revisions of the index. The results found are supportive of the price-pressure hypothesis, suggesting short-term downward sloping demand curves. Effects are materialized through stock prices, traded volumes, and stock liquidity. Moreover, the effects are proven to be stronger and more persistent for additions, compared to deletions. Hence, results point to considerable index effect asymmetry, possibly originating from asymmetric investor awareness. Moreover, the abnormal price, volume, and liquidity movements found have increased through time, as more capital has poured into funds replicating the OBX. Finally, the results do not show evidence of abnormal price fluctuations around revision announcements, confirming the a priori understanding that OBX revisions are information-free events.