An Event Study of the Index Effect: Evidence from the MSCI World Small Cap ex USA Index

Details

Supervisors

Brůna Karel

Faculty

Louvain School of Management

Degree label

Master [120] en sciences de gestion, à finalité spécialisée

Abstract

This thesis studies abnormal returns around the 2025 reconstitutions of the MSCI World Small Cap ex USA Index. The research is based on the quarterly reviews provided by MSCI, as well as LSEG Datastream daily total return data. Event-study methodology is applied in relation to changes within the index portfolio composition (additions and deletions). Abnormal returns are estimated with the Carhart four-factor model, accounting for the effects of the stock market, size, value and momentum. Abnormal returns are obtained, yet their direction differs from predictions related to the traditional index effect. In particular, additions of stocks are associated with negative abnormal returns, whereas deletions bring about positive cumulative abnormal returns in the long run, both measured relative to the Carhart predicted normal return. These results are not fully consistent with traditional hypotheses in the literature. A cross-country analysis is also provided and suggests heterogeneous effects across different regions, especially Europe, Australia and the United Kingdom.