Spillover effects of MSCI inclusion announcement: Evidence and implications from China

We investigate the price reactions of stocks that would not be included in the MSCI global indices to the MSCI inclusion announcement. We document a positive revaluation effect for connected stocks, but not for unconnected stocks. Based on the institutional background and existing theories, we propo...

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Bibliographic Details
Published in:Pacific-Basin finance journal 2024-12, Vol.88, p.102582, Article 102582
Main Authors: Wei, Zhihua, Wu, Deqian, Zeng, Aimin, Li, Bo
Format: Article
Language:English
Subjects:
Index effect
Market segmentation
MSCI inclusion
Spillover effect
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Summary:We investigate the price reactions of stocks that would not be included in the MSCI global indices to the MSCI inclusion announcement. We document a positive revaluation effect for connected stocks, but not for unconnected stocks. Based on the institutional background and existing theories, we propose three non-competing hypotheses: the signaling hypothesis, the speculative trading hypothesis, and the market integration hypothesis. With a series of tests, we demonstrate that the market integration hypothesis can explain this phenomenon. Specifically, the price revaluations of connected stocks are proportional to firm-specific conditional market risk, and this relationship is stronger in firms with high transparency and liquidity and is dampened by the existence of B- or H-shares. Our paper provides new evidence and insights into the impact of global index inclusion on asset prices and the degree of market integration. •There are heterogeneous price reactions for unincluded stocks when MSCI first announced its partial A-share inclusion program.•The market integration hypothesis can explain this heterogeneous price reactions.•The price revaluations of connected stocks are proportional to firm-specific conditional market risk.
ISSN:0927-538X
DOI:10.1016/j.pacfin.2024.102582