Global Equity Index Changes and their Exchange Rate Impact First Draft

Abstract Do exchange rates react to exogenous capital movements? We explore this issue based on the redefinition of the MSCI international equity indices announced on December 10, 2000 and implemented in two steps on November 30, 2001 and May 31, 2002. The index changes implied major changes in the representation of different countries in the MSCI world index. Our event study shows a strong announcement effect in which countries with a decreasing equity representation depreciated against the dollar. Around the two implementation dates, we find further systematic, but opposite, exchange rate effects, which can be interpreted as a result of excessive speculation on the first implementation date and insufficient speculation on the second date. Johann-Ruben Schaser provided outstanding research assistance. We also thank Tamas Calderwook from MSCI for his generous help with the data