Do International Investors' Demand Curves for Stocks Slope Down Too?

Abstract

Using changes in the MSCI Standard Country Indices for 29 countries between 1998 and 2001, we document that stock returns and volumes exhibit "index effects" in international markets similar to those detected by the studies of US stocks. The inclusion of a stock generally leads to higher returns immediately following the announcement followed by a further rise till the actual change with a partial reversion in the post change period. Deletions lead to significant negative returns that continue after the change date. Volumes traded increase significantly and remain at high levels after the change date for the added stocks. There are also considerable cross-country variations in these effects. The evidence is consistent with the downward sloping demand curve hypothesis though some price-pressure effects are also present. Tests using data on ADR availability and free float on stocks added to the indices fail to turn up any evidence in support of information effects.