Forecasting index changes in the German DAX family

  • Combining market data with a publicly available monthly snapshot of Deutsche Börse’s index ranking list, I create a model that predicts index changes in the DAX, MDAX, SDAX, and TecDAX from 2010 to 2019 before they are officially announced. Even though I empirically show that index changes are predictable, they still earn sizeable post-announcement 1-day abnormal returns up to 1.42% and − 1.54% for promotions and demotions, respectively. While abnormal returns are larger in smaller stocks, I find no evidence that they are related to funding constraints or additional risk for trading on wrong predictions. A trading strategy that trades according to my model yields an annualized Sharpe ratio of 0.83 while being invested for just 4 days a year.

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Author:Friedrich-Carl FranzGND
Parent Title (English):Journal of asset management
Publisher:Henry Stewart Publ. ; Proquest
Place of publication:London [u.a.] ; [S.l.]
Document Type:Article
Date of Publication (online):2020/02/18
Date of first Publication:2020/02/18
Publishing Institution:Universitätsbibliothek Johann Christian Senckenberg
Release Date:2023/04/13
Tag:Index effect; Index investing; Index rebalancing; Passive investment; Trading strategy
Page Number:19
First Page:135
Last Page:153
Open access funding provided by Projekt DEAL.

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Institutes:Wissenschaftliche Zentren und koordinierte Programme / House of Finance (HoF)
Dewey Decimal Classification:3 Sozialwissenschaften / 33 Wirtschaft / 330 Wirtschaft
JEL-Classification:G Financial Economics / G1 General Financial Markets / G12 Asset Pricing; Trading volume; Bond Interest Rates
G Financial Economics / G1 General Financial Markets / G14 Information and Market Efficiency; Event Studies
Licence (German):License LogoCreative Commons - Namensnennung 4.0