• effects
• index
• rebalancing

In the last 50 years the financial literature has revealed numerous empirical anomalies, pointing out the theorical inconsistencies of some traditional models (CAPM) and hypothesis (EMH) and stating the invalidity of them. Hence, the modern financial literature, taking into consideration those empirical anomalies, has proposed a vast number of explanation regarding this issue. So, the main purpose of the financial literature is to explain the principal limits of the traditional approaches based on complete information and investors that take their decision rationally.
All the modern Capital Market Theories (APT, CAPM, EHM, MPT etc) fail to explain the empirical anomalies regarding the abnormal returns due to index change, which is the core argument of this thesis. The principal view of capital markets adopt the ‘’perfect-world’’ scenario where markets are perfectly efficient and the asset prices quickly and accurately reflect all the new information available in the market. So, asset prices in an efficient market ‘fully reflect all available information’ (Fama 1991). This implies that the market processes information rationally, in the sense that relevant information is not ignored, and systematic errors are not made. As a consequence, prices are always at levels consistent with ‘fundamentals’.
Despite adopting a ‘’perfect-world’’ scenario, ( from a theorical point of view), some inefficiencies and anomalies are not yet explained by the traditional models. Among the events that the traditional models are not capable to explain, is the case of abnormal returns observed, due to a stock’s inclusion/exclusion from the composition of the main indexes. As I will have the occasion to explain in detail this argument subsequently, in a few words, the core issue regards the study of abnormal returns after the stock’s inclusion/exclusion from a main index. This result is not based on the fundaments of a firm or its performance during the event window, but is due to investors ‘behavior’ according to this event. They consider the stocks included in an index more ‘’attractive’’ and have the belief that inclusion should enhance the liquidity of the underlying stocks.

As all the Capital Market Theories fail to explain this event, some hypothesis have been proposed in the literature regarding this issue:
a) The Price Pressure Hypothesis,
b) The Imperfect Substitutes/Downward Sloping Demand Curve for Stock Hypothesis,
c) The Liquidity Cost Hypothesis, the Information Content/Index Member Certification Hypothesis,
d) The Market Segmentation/Investor Recognition Hypothesis
The main purpose of this study, being inspired from the previous contribute of R. Barontini and S. Rigamonti (2000), is to test whether the addition/deletion from the index has an impact on firm’s performance, to verify the trend of abnormal returns already observed, make a comparison between the empirical evidence found in the Italian market and the USA’s one and to extend their analysis in a period of time that goes from year 2003 till 2012.
The Methodology used in this analysis is the Event-Study Methodology. This methodology was first introduced by Fama, Fisher, Jensen and Roll (FFJR) (1969). FFJR started a methodological revolution in accounting and economics as well as finance, since the event study methodology has also been widely used in those disciplines to examine security price behavior around events such as accounting rule changes, earnings announcements, changes in the severity of regulation and money supply announcements. The event study methodology has, in fact, become the standard method of measuring security price reaction to some announcement or event.
The results of this study, as we will have the possibility to examine in detail subsequently are summarized as follows:
1. The existence of o temporary effect on prices, due to the inability of the market to respond immediately to demand shocks ( due to the fact that investor rebalance their portfolios with included stocks in the index). This effect tend to disappear in a few days/weeks after the event taken into consideration. This study was proposed in the literature by Harris e Gurel (1986), Pruitt e Wei (1989), Beneish e Whaley (1996), Lynch e Mendenhall (1997), La Plante e Muscarella (1997).
2. The existence of a permanent effect on prices, due to the shift of the demand curve for socks. This theory was first proposed by Shleifer (1968) and than followed by others as Wurgler and Zhuravskaya (2002), wich argued that stocks market do not work as effectively as theory suggests because individual stocks do not have perfect substitutes and when arbitrageurs hedge with opposite positions in imperfect substitutes, they bear the risk.
3. The existence of a permanent effect on price due to a real change on a stock’s value. This effect is driven by some consideration regarding the stability condition of a firm which stocks are part of an index. This hypothesis, also named ‘’signaling’’ or Certification of an Index Member, was first supported by Neubert (1985), and then was integrated by the model of Merton (1987) regarding the effect of investor awareness and found empirical evidence on the studies of Chen, Noronha e Singal (2002).

4. The existence of a permanent effect on prices due to an important piece of information that is revealed and an enhance of the liquidity when an index becomes member of an index. The Information Content Hypothesis was supported by the findings of Dhillon and Johnson (1991) , rather the Liquidity Hypothesis was first introduced by the studies of Amihud and Mendelson (1986). Both these hypothesis makes stocks members more appealing and enhance their values.

Now it is time to articulate the content of this thesis. In the first chapter, I introduce the concept of Capital Market Theories, in particular the concept and the main characteristics of Efficient Market Theory (EHM) and The Capital Asset Pricing Model (CAPM). In the second chapter generally is spoken about empirical studies regarding market efficiencies and index variation. Particularly, the main idea of the second chapter is to point out why neither EMH, nor CAPM cannot explain the event of abnormal returns due to a stock’s inclusion/exclusion from an index. That is for two main reasons: 1) some stock market anomalies have been shown to be quite robust to violate the efficient market hypothesis and supporters of the efficient market hypothesis can argue that many of the violations of the hypothesis (subsequently explained) are instead examples of the ‘bad model’ problem related to the simplifying assumption of the CAPM. In the third chapter is shown the main object of this thesis and the methodology used ( The Event- Study Methodology), and to conclude the last but not least chapter, in which are represented the interpretation of the result and the final conclusions.