The Anatomy of Index Rebalancings: Evidence from Transaction Data

We exploit novel transaction-level data from Colombia to analyze episodes of additions to and deletions from MSCI equity indexes. We find additions and deletions to have large price effects (5.5%). We show that these effects are due to large demand shocks by different classes of international investors - beyond passive funds and ETFs - which are not absorbed by arbitrageurs. Consistent with asset pricing models with limits to arbitrage, stock demand curves are very inelastic: the median elasticity in our sample is -0.34, implying that a 1% increase in the demand for a stock increases its price by 2.9%.