The liquidity effects of revisions to the CAC40 stock index

This article explores liquidity effects following CAC40 index revisions over the time period 1997 to 2001. We find evidence of a sustained increase (decrease) in the liquidity of the added (deleted) stocks. Furthermore, the improvement (reduction) in the liquidity of the stocks is due to a decrease (increase) in the direct cost of trading as opposed to a reduction (enhancement) in the asymmetric information cost of transacting. The empirical findings support the information cost, liquidity explanation. This is because investors demand a smaller (larger) risk premium for investing in stocks with more (less) available information.