NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Investing in the Presence of Massive Flows: The Case of MSCI Country Reclassifications

Terence C. Burnham, Harry Gakidis, Jeffrey Wurgler

NBER Working Paper No. 23557
Issued in June 2017
NBER Program(s):   AP

Almost $10 trillion is benchmarked to Morgan Stanley Capital International’s Developed, Emerging, Frontier, and standalone market indexes. Reclassifications from one index to another require thousands of investors to decide how to react. We study a comprehensive sample of past reclassifications to inform this decision. On average, reclassified markets’ prices substantially overshoot between the announcement and effective dates—prices fall when a market moves from an index with more benchmarked ownership to one with less, such from Emerging to Frontier, and vice-versa—but largely revert within a year. We identify alpha-maximizing responses to reclassifications for both benchmarked and more flexible investors.

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Document Object Identifier (DOI): 10.3386/w23557

 
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