Index premium in Nordic stock markets

Abstract. This thesis examines the index premium phenomenon in Nordic stock markets during 2008–2020 using two event dates for each inclusion and exclusion in a sample of 819 events in total from 18 indices focused on Nordic stock markets. In addition to classic short term event study, this thesis extends it with long term windows following Lynch and Mendenhall (1997) in order to capture long term behaviour of abnormal prices with regards to the two event dates for each inclusion and exclusion. The empirical results show abnormal price action around small cap and the entire region spanning index composition change announcements for affected stocks as well as the abnormal price action of affected stocks as the composition change is which they are excluded is implemented. The reaction to exclusion is larger in magnitude and behaves differently to that of inclusions. For changes in country specific blue chip indices no abnormal price action is detected. Although minor index premium as found in this thesis is expected based on the previous theoretical and empirical literature, the behaviour of the premium found here is contradictory to previous literature