Stock price and volume effects associated with changes in the composition of the FTSE Bursa Malaysian KLCI

• We examine the effects of changes in the composition of the Malaysian KLCI Index.
• We report evidence supporting the price pressure hypothesis.
• Stock price effect is entirely reversed after the announcement of the news.
• Trading volume effect is entirely reversed after the announcement of the news.
• Changes in liquidity cause trading volume and stock prices to reverse.

We examine the stock price and volume effects associated with changes in the composition of the FTSE Bursa Malaysia Kuala Lumpur Composite Index (KLCI), over the time period of 2005–2012. We find evidence to support the price pressure hypothesis for both additions to and deletions from the KLCI. This is because significant stock price and trading volume effects in the pre index revision period are entirely reversed after the announcement of the news. Our empirical findings can be explained by the market microstructure literature. Significant changes in liquidity cause trading volume and stock prices to reverse back to their original level before the index revisions took place.