The impacts of index rebalancing and their implications: Some new evidence from Japan

This study investigates the Nikkei 225 rebalancing. Unlike those for changes in the S&P 500, the price effects are permanent for both additions and deletions despite significant price reversals around both the announcement and effective days. The permanent price effects are shown to be consistent with the imperfect substitute hypothesis. Furthermore, the 'arbitrage game', as documented for the S&P additions, is played with both the Nikkei 225 additions and deletions. Lastly, consistent with its higher popularity, the Nikkei 225 changes induce more pronounced price and volume effects, more arbitrage trading, but less long-term volume effects than the Nikkei 500 reshuffles.