The Effect of Exclusion from the Index on Momentum Return? Evidence from Grouping in Borsa İstanbul

Abstract

The Capital Markets Board of Turkey imposes the “ABC Regulation” in July 2010 in order to categorized companies based on their market capitalization and floating rate. On October 2014, the Capital Markets Board of Turkey announced to new grouping scheme which assigns the companies into four different groups instead of three.

The aim of this study is to examine the impact of this new grouping regulation on momentum profit. The return of momentum strategy is a persistent anomaly in stock markets not only in the U.S. but also in other countries. Prior studies show that stock exclusion from the indexes leads an increase in momentum profits. In this study, I would like to investigate the impact of the exclusion on momentum profit using the grouping change in Borsa İstanbul. This exogenous change provides us a clearer area to investigate the effect of exclusion since the company might be still listed on BIST-100 index.

A sample of the study covers two years before the regulation change (October 2014) and two years after. My treatment group will be the one which moves from group A to B in October 2014 and stays in the same group for the next two years. I also control for the size effect and liquidity effect of the companies. In this analysis, univariate and bivariate sorting analyses are used as well as cross-sectional regression analysis.