Abstract

A stock market index is designed to measure the performance of value of a set of stocks. The set of stock can be entire market of a particular country or a sector. Indices can be used not only to see how the stock market, for instance, has changed over time, but it allows easy comparison between stocks that represent different sectors or even different stocks. An index construction or rebalancing of existing index is a major market event that investor might know before the event take place. The index inclusion reflects a positive situation about the quality, risks and possible future return of the stock. This study examine whether any price and trading volume effects arise from S&P SL 20 index construction. S&P SL 20 index was launched in 26, June 2012, based on 20 blue chip companies in Sri Lanka. The current study employs the standard event study methodology to identify the abnormal returns associated with the launching of the S&P SL 20 index. Three normal return benchmarks, namely the market-adjusted model, mean-adjusted model and the market model have been used for the purpose of finding abnormal returns. Price series and volumes of stocks in S&P SL 20 list (after and before) were considered and those are retrieved from Colombo stock exchange.

The study finds that the abnormal returns following the launch of the S&P SL 20 index is statistically insignificant.

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