Public Equity Reclassification Events in Emerging and Frontier Market Indexes
An Investigation of MSCI Indexes in International Markets
Dylan Cooney
Northwestern University
Mathematical Methods in the Social Sciences, Senior Thesis December 2018
Advisor: Professor Robert Korajczyk
Abstract
This paper investigates the relationship between investigates whether or not the pairwise correlation between Emerging Market Equity Index Components changes when a country is reclassified in or out of the MSCI Emerging Market Index. The paper does the same analysis for both Frontier Market Equity Index Components and an aggregation of both the MSCI Emerging Market Index and the MSCI Frontier Market Index. This analysis is done by using a difference- in-differences regression of the panel data of the 30-day, 20-day, and 15-day pairwise correlations before and after a reclassification event. In all cases, a highly, statistically significant negative relationship is found between an equity index reclassification event and the index’s pairwise correlations with other components of the MSCI Index Group. This result is true for all nine regressions in this paper. Acknowledgments
When I told Professor Ely that I want to graduate two quarters early and still finish my senior thesis, I think he thought I was crazy. Thank you for letting be me crazy, Professor Ely.
Professor Korajcyzk, thank you for agreeing to be my thesis advisor throughout the quarter.
None of this would have been possible without your help. To the friends and family that heard me complain along the way, most of you will probably never read this, but for those of you who do, thanks.
I. Introduction 1 II. Literature Review 2 III. Data & Methodology 9 IV. Results 13 V. Conclusion 15 VI. Appendix 17 VII. Bibliography 27
I. Introduction
The purpose of this paper is to investigate how a growth in passive investing, largely facilitated through exchange-traded-funds, otherwise known as ETFs might lead to unintended market distortions in foreign stock markets. There has been much research done in U.S. equity markets examining possible market distortions that might occur as a result of increasing passive investment, but this research has been much more limited in foreign markets, especially emerging markets and developing economies.
It has been documented in domestic markets that as ETF ownership increase, the co- movements of individual securities also increase. It has also been well documented that the inclusion of a security in an index can boost its price. (See the literature review for more background on these previous findings.) A reclassification event is when an individual country index is added or deleted from an MSCI Index composed of multiple individual company indexes. This paper will test whether reclassifications of emerging market equity indexes and frontier market equity indexes cause the co-movements of those entire emerging market equity markets to change with respect to the other emerging market equity markets that are components of that index.
To investigate these possible effects, this paper will focus on MSCI Index country reclassifications. There have been 21 country reclassifications by MSCI from 1997 to 2018, and the list of counties has been broad ranging from Pakistan to Trinidad & Tobago. Additionally, some countries were upgraded from frontier to emerging market classifications while others were downgraded from frontier markets to standalone. Furthermore, because these reclassifications are diverse in region and time, it is hoped that these will provide a reliable non-clustered sample to investigate potential market distortions.
1 II. Literature Review
Defining an Exchange-Traded Fund (ETF):
An exchange-traded-fund, otherwise known as an ETF, is an investment vehicle that functions similarly to a mutual fund. Like many mutual funds, many ETFs invest passively.
However, unlike a mutual fund, an ETF does not trade directly with capital markets. An ETF manager such as Blackrock or Vanguard will enter into an agreement with multiple financial institutions and market-makers who in turn interact directly with equity markets. These institutions are referred to as Authorized Participants. “In particular, the ETF manager can issue or redeem shares with Authorized Participants in large blocks, known as creation units, in exchange for a basket of securities and/or cash. This mechanism, by which the shares of the ETF are adjusted in response to supply and demand, is known as the creation/redemption mechanism”
(Lettau and Madhavan 137). Like some mutual funds, ETFs are usually passive in nature, but not always.
The growth of passive investing, primarily through ETFs:
There were $531 billion in ETF assets under management in 2008, but by 2017 there were $3.4 trillion (Pisani). (This growth far outpaces the returns of U.S. equity markets during that time, indicating net capital inflows into these investment vehicles.) However, globally, assets of exchange-traded-funds were about $4.4 trillion in September 2017 (Lettau and
Madhavan136). This demonstrates that even in the last few months there have been substantial capital inflows into ETFs. The growth in exchange-traded-funds looks even more drastic when compared to growth rates of mutual funds, another common passive investment vehicle. In 1999,
US equity index mutual funds had roughly $300 billion in assets under management, but that grew to $1.8 trillion by 2016 (Ben-David et al. 175). That is a factor of 6 over those 17 years.
2 However, ETFs tracking US equity indexes grew from $30 billion to $1.3 trillion over the same period, a factor of around 43.
Problems with passive investing:
There are several variations of passive investing, but the most common type of passive investing is to own a market-capitalization-weighted index such as the S &P 500. This allows retail investors and institutions alike to gain broad exposure to equities markets without individual stock risk and with reduced trading and management fees. It is often considered one of the most responsible investment strategies for an investor to utilize, and this is likely true for the vast majority of investors. Essentially, this strategy is based on the validity of the Efficient
Market Hypothesis.
However, passive investing may cause unintended consequences in markets if the strategy is deployed by too many market participants. Passive investing by definition is a rules- based mechanical process that allocates capital independent of company fundamentals. As a result, there is the potential for price distorting positive feedback loops which causes stock prices to become detached from their intrinsic values. One possible expression of this could be large capitalization stocks. Because most indices and passive investment strategies are weighted according to market capitalization, “the bigger the firm, the more it will be owned by passive index funds. Such trends could result in misallocation of capital, as money will blindly flow into stocks of large companies regardless of underlying health. This risk could create asset bubbles concentrated in large companies” (Yu). There is a danger that “passive funds could conceivably contribute to price overshooting if their fund flows are sizeable” (Shushko and Turner 123).
Furthermore, passive investing can increase herding and extend market momentum.
Essential, because a large portion of the market is being traded by a disproportionate amount of
passive investing, an “increase in stock price begets further increase in stock price. Large swaths of the market could move in lockstep, decreasing volatility and increasing correlation among stocks. This diminishes the need for fundamental analysis - a stock's fair value could deviate greatly from its traded price - and the conventional wisdom of "diversifying one's portfolio" would become ineffective” (Yu).
Expanding upon this idea, as passivity becomes more widespread, markets lose their efficiency and incentive structure for finding and pricing in relevant information into individual security prices. Passive investing creates a positive feedback loop that reinforces current market prices. Usually, when inefficiencies arise, investors can take advantages of these opportunities, capitalizing on them for a profit and driving prices back to an efficient level. However, much like an investor sustaining a short positive for a long period of time, many active investors may be forced out the market before their positions can yield a profit, at least according to the theory presented by Philosophical Economics. Passive investors will never set prices based on fundamental value because the whole point of passive investing is to allow investors to invest responsibly without conducting research and due diligence. As result, passive investors cannot set prices, and all of “their transactions are forced to occur immediately in order to preserve the passivity of their allocations–they cannot simply lay out desired bids and asks and wait indefinitely for the right prices to come, because the right prices may never come. To lay out a desired bid and ask, and then wait, is to speculate on the future price, and passive funds don’t do that. They take whatever price is there…[As a greater portion of assets are managed passively] a much smaller pool of resources will be devoted to doing the ‘work’ –i.e., the fundamental research, the due-diligence, etc. – necessary to set prices correctly”
There have been academic studies that legitimize many of these concerns. “Numerous academic studies across a range of equity markets have identified co-movements and other trading effects as securities are added to a benchmark index,” and as passive investment grows in popularity, these effects will likely increase in magnitude (Sushko and Turner 120). Essentially, because such a substantial portion of investors are investing passively, the entire equity market is being traded as a single security (which is exactly what an ETF tracking an indexed is intended to facilitate), and this causes the underlying assets within that index to begin to trade in lock-step.
This should be concerning to passive investors. If the market is not pricing in individual companies' characteristics, then the popularity of passive investing may actually invalidate its underlying assumption, the Efficient Market Hypothesis.
In a study by Israeli et al., increased ETF ownership decreased the informational environment of stocks, in other words, it becomes more expensive for the market price discovery mechanism to function. As ETF ownership increased, price discovery becomes harder because bid-ask spreads increase, driving up transaction cost. Additionally, fewer analysts cover the firm, and stock prices became less sensitive to earnings announcements, indicating a partial detachment from price and fundamentals. In short, stocks are less responsive to information as
ETF ownership increases. Israeli, et al. recently found that a “one-percentage point increase in
ETF ownership is associated with approximately a 9-percentage point increase in” annual returns synchronicity, which is the amount stock returns move with the market and the stock’s related industry” (Israeli et al. 4).
Problems associated with index classifications:
Outside of passivity broadly, there have also been distortions documented from index classifications. This is largely because passive investors follow an index, so an index
reclassification results in rules-based trades and rebalancing. One study by Madhavan on the
Russell 2000 and 3000 indexes for 1996 through 2002, “found that, on average, stocks projected to be index additions (deletions) experienced positive (negative) abnormal returns in March–
June. The equity returns documented here were concentrated in time and were much larger in magnitude and in the number of stocks affected than the corresponding effects for S&P 500 revisions, the focus of much previous research” (Madhavan 62-63). Some of these returns were the result of temporary price pressure and others were the result of permanent changes in liquidity which warranted the security trading for a premium. The results in the study demonstrated a viable investment strategy based on index revisions “are large and can be predicted with increasing accuracy as the reconstitution date approaches” (Madhavan 62).
Another study examined mutual funds and ETFs tracking the S&P 500 index found that
“the valuations of S&P 500 constituents increased by 139 to 167 basis points relative to nonconstituents, depending on valuation metric, due to S&P 500 index fund money flow,” and that “valuations of firms within the S&P 500 index respond positively to changes in S&P 500 index fund money flow while the valuations of firms outside the index do not,” (Belasco, et al.
2012, 1067). This finding demonstrates how simply being a component in an index can drive returns for a stock, possibly without fundamental justifications.
Problems with ETFs specifically in emerging markets:
Although a study by Kacperczyk, Savita, and Wang indicates that increased foreign ownership might actually increase market efficiency, this effect may not be true for passive foreign investment. Another study found that as the use of ETFs as a conduit for capital flows to emerging markets increases, an emerging market economy’s correlation to the global financial cycle increased. This study shows “one example of how the rising popularity of passively
managed, benchmarked instruments contributes to market co-movement and capital flows synchronicity at the expense of local fundamentals” (Williams 21-22).
The reason for this detachment from fundamentals is a result of increasing demand for
ETFs. The increasing demand for ETFs “results in price pressure, which is then transmitted to the underlying basket of shares as arbitrageurs simultaneously take opposite positions in the ETF and the underlying shares,” (Da and Shive 2017, 137). As a fund receives capital inflows, the
ETF manager must buy the basket of underlying stocks which drive up the prices of the underlying securities.
Some researchers assert that the fund flow mechanics of ETFs limit price discovery and cause prices to deviate away from fundamental values, especially in hard-to-trade assets, assets in which an ETF arbitrageur cannot immediately close the difference in value that may result between the net asset values of the underlying and the ETF. Bhattacharya and O’Hara (2017) modeled market fragility with respect to ETFs in hard-to-trade assets. They found that when the underlying assets are hard-to-trade, ETFs allow for significant price discovery, because investors
“cannot easily access underlying markets.” However, ETFs increase the potential for market instability, because a market maker, when using ETF prices as a source of information, cannot
“perfectly distinguish between price changes caused by factors pertinent to his asset” and irrelevant factors. This leads to a scenario where “idiosyncratic shocks pertinent to one asset begin to affect the price of another independent asset” via the ETF channel” (Bhattacharya and
O’Hara 5).
In a small enough equity market, it is conceivable that inclusion in an emerging market index with a simultaneous increase in capital inflows from passive investing could cause that country’s equity market to have increased co-movement with the other equity markets within that index which is the primary focus of this paper. Furthermore, Da and Shive found that “a
one-standard-deviation increase in the turnover of a typical ETF,” where turnover is defined as the average over the month of the ratio of the daily number of shares traded to the number of shares outstanding that day, can be associated with a 1% increase in correlations in its underlying stocks, with a stronger relationship for larger ETFs and those that trade at the same time as the underlying (Da and Shive 2017, 138). After controlling for stock and time fixed effects, Da and
Shive found that increased ETF ownership results in greater co-movement over the next month and an average increase of beta equal to 0.03. Higher levels of co-movement minimize firm- specific information, and it does not seem unreasonable to assume that this phenomenon could appear across entire equity markets if those markets are small enough to be greatly impacted by relatively small capital movements from index reclassification and/or passive investing. In fact,
Ben-Rephael, et al. also found that mutual fund flows “create temporary price pressure that is subsequently corrected,” (Ben-Rephael, et al. 2011, 585). Specifically, they found fund flows are correlated with market returns and around half of the price change due to fund flow pressures are reversed within 10 trading days.”
III. Data & Methodology
Given the rise in passive investing over the past several decades, it would be expected that reclassification events would cause a greater change in pairwise correlations between MSCI
Emerging Market and Frontier Market Components in more recent time. However, it is difficult to determine the level of capital being allocated passively to any individual MSCI country index.
Capital could be deployed by domestic or international investors through a variety of investment vehicles: mutual funds, ETFs, hedge funds, etc. Additionally, there may a large amount of capital that is essentially tracking an MSCI index in a passive fashion but with small alterations. This is frequently done by investment management firms so that they can differentiate their investment product from what would otherwise be a commoditized passive investment vehicle.
With all that said, this paper has chosen to limit its analysis of changes in pairwise correlations without attempting to calculate the amount of capital tracking MSCI Indexes at any point in time. If there is any effect to be detected, the omission of these variables will bias down the estimate of reclassification’s effect on correlations. The goal of this paper is to determine whether or not adding or deleting an individual country’s equity index into MSCI Emerging
Market Index and the MSCI Frontiers Market Index causes that country’s index’s pairwise correlation returns with other components of that index to change. It is expected that inclusion within the index would cause the correlation between index returns to increase. Individual equity markets being grouped together might cause them to trade as if they were a single entity as result of passive investing. As a result, being added to an index would be expected to cause pairwise correlations to increase and being deleted from an index would be expected to cause pairwise correlations to decrease.
The analysis will include all current and past MSCI Emerging Market Components and all current and past MSCI Frontier Market Components from November 1997 to June 2018. The
9 current components of both indexes were taken off of MSCI’s website during October 2018. The complete list of Index Reclassifications is also provided online. All of this information is summarized in Figure 1, Figure 2, and Figure 3. The prices for each individual country index were downloaded from the Bloomberg Terminal in November 2018. Historical price data for each individual index is provided for trading days starting November 2, 1995, and ending,
November 2, 2018. (Note not all of this price data was needed for the analysis.) Of the price data downloaded, many trading days necessary for running a complete analysis were missing data, making it impossible to calculate the returns and the pairwise correlations for every possible data point under analysis. As a result, the incomplete data observations were omitted from the final analysis. A more complete data set might provide stronger results.
To begin the analysis the daily returns for each index were calculated using the formula:
4$56#,7 8+#9(-,/ !"#$% '()*+,-,/ = ln ( ) 4$56#,7 8+#9(-,/:;
The pairwise correlations between the reclassified country index and the components of the
MSCI Index in question were then calculated before the date of reclassification and the date after reclassification. The correlations were calculated on 30-day, 20-day, and 15-day basis, using the formula below:
45?"+#",9((#, @) =-> = A-A> where Ai and Aj are the standard deviations for the individual country indexes i and j. Although other time scales could have been chosen, the correlations above were chosen because any sample size smaller than 15 trading days will be too small a sample size to conduct an accurate analysis. 15 trading days is arguably too short a time span itself. Additionally, because reclassifications are a short-term event, the analysis should be as granular as possible. Any time span beyond 30 trading days, likely stretches this, including too many trading days which are no
longer affected by the reclassification event. (However, it is worth noting that this would not be true if a permanent change after reclassification is expected.)
To estimate the change in pairwise correlations between MSCI EM & FM components, the following three regressions were estimated using a difference-in-differences model for the panel data on each pair of individual country indexes to see if the reclassification had any effect on the pairwise correlation of the country being added or deleted from the index:
Aggregate Regression
=->,/ = B;(C5)ℎ E,F(G(6 #, HI4E JH/LH->,/) + BN('(9$"66#O#(F E,F(G #, 8"#+->,/)
+ BP(QC5)ℎ E,F(G(6 #, HI4E JH/LH->,/R ∗ Q'(9$"66#O#(F E,F(G #, 8"#+->,/R)
+ T->,/
Emerging Market Regression
=->,/ = B;(C5)ℎ E,F(G(6 #, HI4E JH->,/) + BN('(9$"66#O#(F E,F(G #, 8"#+->,/)
+ BP(QC5)ℎ E,F(G(6 #, HI4E JH->,/R ∗ Q'(9$"66#O#(F E,F(G #, 8"#+->,/R)
+ T->,/
Frontier Market Regression
=->,/ = B;(C5)ℎ E,F(G(6 #, HI4E LH->,/) + BN('(9$"66#O#(F E,F(G #, 8"#+->,/)
+ BP(QC5)ℎ E,F(G(6 #, HI4E LH->,/R ∗ Q'(9$"66#O#(F E,F(G #, 8"#+->,/R)
+ T->,/
The variable C5)ℎ E,F(G(6 #, HI4E JH->,/ is dummy variable equal to 1 whenever both index i and j is in the MSCI Emerging Markets index. '(9$"66#O#(F E,F(G #, 8"#+->,/ is a dummy variable equal to 1 whenever either index i or j is the individual country index being reclassified. The last variable is the first two dummy variables multiplied together. As a result, it will equal 1 only when the individual country index undergoing the reclassification event is in
the pair, and when the index being reclassified is currently included in the index. The t denotes whether or not the event is pre-reclassification or post-reclassification.
It is important to note that whether or not both indexes are in the MSCI pair in question will vary in time depending on whether the reclassification is an addition or a deletion. In other words, the typical “treatment period” for a difference-in-differences approach reverse for an addition relative to a deletion. This was adjusted for when creating the dummy variables so that addition and deletion events could be analyzed together.
The first regressions analyze all reclassification events between both the MSCI Emerging
Market Index and the MSCI Frontier Market Index as a single data set. The two regressions below it separate the data into the respective MSCI indexes. As stated before, each regression is run using a 30-day correlation, 20-day correlation, and 15-day correlation. This creates a total of
9 regressions. All three variables in the regression are dummy variables that equal 1 if true and 0 if false. The most important variable in each of the regressions is the BP. This coefficient indicates whether or not the reclassified index has a resulting change in pairwise correlations.
IV. Results
There is a remarkable degree of uniformity across all nine regressions, regardless of the index(es) being analyzed or the time span used to generate correlations. Every coefficient in each of the nine regressions had a P-value of 0.000. The P-value of each regression’s F-statistic also had a value of 0.000. Furthermore, the value for the BP in each of the nine regressions stayed within a fairly tight range, indicating a fairly uniform effect across both Emerging Market and
Frontier Markets, regardless of whether or not they were analyzed separately or in aggregate.
BP in the aggregate regression ranged from -0.250 to -0.259 depending on the time span used to calculate correlation. This suggests that a reclassification event leads to a 25% decrease in pairwise correlations for the individual country that was reclassified. The same trend holds true for both the Emerging Market Index and the Frontier Market Index analyzed individually.
BP in the Emerging Market Index ranges from -0.250 to -0.281 depending on the time span used to calculate correlation. BP in the Frontier Market Index ranges from -0.250 to -0.255 depending on the time span used. All this suggests with a reclassification event should lead to roughly a
25% decrease in pairwise correlation regardless of the MSCI Index being analyzed or the time span being used, assuming these are limited to those analyzed within this paper. This was not the result expected initially.
However, for individual countries that do not undergo a reclassification, it appears that
MSCI Index membership does increase pairwise correlation. B; in MSCI in the aggregate regression ranged from 0.219 to 0.228 depending on the time span used to calculate correlation. in the Emerging Market regressions ranged from 0.282 to 0.293, and the B;in the Frontier Market regressions ranged from 0.176 to 0.181. This suggests that membership in the MSCI Emerging
13 Market Index produces a higher increase in pairwise correlation among its components than does membership in the MSCI Frontier Market Index among its components.
Of the three data groups, the MSCI Emerging Markets Index when analyzed independently had the highest R-squared. It had a 0.3921 R-squared, a 0.3756 R-squared, and a
0.3678 for the 30-day, 20-day, and 15-day pairwise correlation analyses respectively. The MSCI
Frontier Markets Index had an R-squared of 0.2103, 0.1843, and 0.1691 for its 30-day, 20-day, and 15-day pairwise correlation analyses respectively. The Aggregated analyses of both datasets had R-square’s in between both of them, as would be expected, of 0.2756, 0.2590, and 0.2523 for its 30-day, 20-day, and 15-day pairwise correlation sets respectively.
V. Conclusion
Although it is tempting to conclude that a reclassification event causes the pairwise correlations between indexes to decrease, there are several shortcomings in the analysis. First, although the data sets used were large and produced a high degree of statistical confidence in the resulting regressions, roughly half of the total pairwise correlation pairs that could exist were missing as a result of incomplete individual country index historical price data. It is possible that if more historical return data could be added to generate a more complete correlation data set, there would be a different result. With that said, there is no reason to believe that sample is unrepresentative of the entire data set.
Additionally, this analysis did not attempt to factor in the amount of capital tracking a specific MSCI Index nor the effects that time had on the degree of these correlation changes. If an accurate estimation for capital tracking these indexes could be made, further analysis could be done that might challenge the results of this paper.
With all that said, assuming the analysis is done correctly and that the data isn’t tainted in some unforeseen way, the results indicate that inclusion in the MSCI Emerging Markets Index or the MSCI Frontier Markets Index actually reduces the pairwise correlation between the reclassified country and the other components in the MSCI Index. This is unexpected, but it was the analysis showed.
One possible explanation for this is that inclusion in an MSCI Index provides a stamp of approval to institutional investors. When a country gains admission into an index, investors with an investment mandate that prevents them from trading outside of MSCI Emerging Market or
Frontier Market components are able to actively trade the individual country indexes once they become classified as an MSCI component. If this is the case, the indexes that are granted
15 inclusion may become trade more actively, causing the securities within the individual index to trade closer to their fundamental values. As result, the country itself trades closer to its intrinsic value, reducing unjustified correlation that may have existed simply as a result of a lack of active investing. This is just one possible explanation, and more work would need to be done be a definitive answer could be provided.
VI. Appendix
Figure 1: Active Allocations for Retail and Institutional Investors, U.S. Domestic Equity
17 Figure 2: MSCI Reclassifications Events
Bloomberg Ticker Bloomberg Index MXCN1A Index MXPK Index MXWAEM Index MXBU Index MXUK Index MXQA Index MXAE Index MXGR Index MXMA Index MXTT Index MXIL Index MXBD Index MXAR Index MXTT Index MXPK Index MXPK Index MXJO Index MXLT Index MXRS Index MXLK Index MXVE Index MXLK Index MXGR Index MXPT 5/31/2018 5/31/2017 8/31/2016 8/31/2015 5/30/2014 5/30/2014 5/31/2011 5/31/2010 5/31/2010 5/29/2009 5/29/2009 5/29/2009 5/31/2006 6/29/2001 5/31/2001 11/30/2016 11/29/2013 11/29/2013 12/31/2008 11/28/2008 11/28/2008 11/28/2008 11/30/2007 11/28/1997 Exact Date Exact Jun-01 Aug-16 Aug-15 Dec-08 Nov-16 Nov-13 Nov-13 Nov-08 Nov-08 Nov-08 Nov-07 Nov-97 May-18 May-17 May-14 May-14 May-11 May-10 May-10 May-09 May-09 May-09 May-06 May-01 DATE* MARKET RECLASSIFICATION Markets MARKET Emerging the in included Shares China-A Markets Emerging to Markets Frontier From Markets Frontier to Standalone From Standalone to Markets Frontier From Standalone to Markets Frontier From Markets Emerging to Frontier From Markets Emerging to Frontier From Markets Emerging to Developed From Markets Frontier to Emerging From Standalone to Markets Frontier From Markets Developed to Emerging From Markets Frontier to Standalone From Markets Frontier to Emerging From Markets Frontier to Standalone From Markets Frontier to Standalone From Standalone to Emerging From Markets Frontier to Emerging From Markets Frontier to Standalone From Markets Frontier to Standalone From Markets Frontier to Standalone From Standalone to Emerging From Standalone to Emerging From Markets Developed to Emerging From Markets Developed to Emerging From
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Figure 3: Emerging Market Components at Time of Reclassifications
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*Newly Added **Newly Added 5/29/2009 12/31/2008 11/28/2008 11/30/2007 5/31/2006 6/29/2001 5/31/2001 11/28/1997 MXBR Index MXBR Index MXBR Index MXBR Index MXBR Index MXBR Index MXBR Index MXBR Index MXCL Index MXCL Index MXCL Index MXCL Index MXCL Index MXCL Index MXCL Index MXCL Index MXCO Index MXCO Index MXCO Index MXCO Index MXCO Index MXCO Index MXCO Index MXCO Index MXMX Index MXMX Index MXMX Index MXMX Index MXMX Index MXMX Index MXMX Index MXMX Index MXPE Index MXPE Index MXPE Index MXPE Index MXPE Index MXPE Index MXPE Index MXPE Index MXCZ Index MXCZ Index MXCZ Index MXCZ Index MXCZ Index MXCZ Index MXCZ Index MXCZ Index MXEG Index MXEG Index MXEG Index MXEG Index MXEG Index MXEG Index MXEG Index MXEG Index MXGR Index MXGR Index MXHU Index MXHU Index MXHU Index MXHU Index MXHU Index MXHU Index MXHU Index MXHU Index MXPL Index MXPL Index MXPL Index MXPL Index MXPL Index MXPL Index MXPL Index MXPL Index
MXRU Index MXRU Index MXRU Index MXRU Index MXRU Index MXRU Index MXRU Index MXRU Index MXZA Index MXZA Index MXZA Index MXZA Index MXZA Index MXZA Index MXZA Index MXZA Index MXTR Index MXTR Index MXTR Index MXTR Index MXTR Index MXTR Index MXTR Index MXTR Index
MXCN Index MXCN Index MXCN Index MXCN Index MXCN Index MXCN Index MXCN Index MXCN Index MXIN Index MXIN Index MXIN Index MXIN Index MXIN Index MXIN Index MXIN Index MXIN Index MXID Index MXID Index MXID Index MXID Index MXID Index MXID Index MXID Index MXID Index MXKR Index MXKR Index MXKR Index MXKR Index MXKR Index MXKR Index MXKR Index MXKR Index MXMY Index MXMY Index MXMY Index MXMY Index MXMY Index MXMY Index MXMY Index MXMY Index MXPK Index MXPK Index MXPK Index MXPK Index MXPK Index MXPK Index MXPK Index MXPH Index MXPH Index MXPH Index MXPH Index MXPH Index MXPH Index MXPH Index MXPH Index TAMSCI Index TAMSCI Index TAMSCI Index TAMSCI Index TAMSCI Index TAMSCI Index TAMSCI Index TAMSCI Index MXTH Index MXTH Index MXTH Index MXTH Index MXTH Index MXTH Index MXTH Index MXTH Index MXMA Index MXMA Index MXMA Index MXMA Index MXMA Index MXMA Index MXMA Index MXMA Index MXIL Index MXIL Index MXIL Index MXIL Index MXIL Index MXIL Index MXIL Index MXIL Index MXAR Index MXAR Index MXAR Index MXAR Index MXAR Index MXAR Index MXAR Index MXAR Index MXJO Index MXJO Index MXJO Index MXJO Index MXJO Index MXJO Index MXLK Index MXLK Index MXLK Index MXVE Index MXVE Index MXVE Index MXVE Index MXPT Index
Figure 4: Frontier Market Components at Time of Reclassifications
5/31/2018 5/31/2017 11/30/2016 8/31/2016 8/31/2015 5/30/2014 11/29/2013 5/31/2011 5/31/2010 MXAR Index MXAR Index MXAR Index MXAR Index MXAR Index MXAR Index MXAR Index MXAR Index MXAR Index MXCR Index MXCR Index MXCR Index MXCR Index MXCR Index MXCR Index MXCR Index MXCR Index MXCR Index MXEST Index MXEST Index MXEST Index MXEST Index MXEST Index MXEST Index MXEST Index MXEST Index MXEST Index MXLT Index MXLT Index MXLT Index MXLT Index MXLT Index MXLT Index MXLT Index MXLT Index MXLT Index MXKA Index MXKA Index MXKA Index MXKA Index MXKA Index MXKA Index MXKA Index MXKA Index MXKA Index MXRO Index MXRO Index MXRO Index MXRO Index MXRO Index MXRO Index MXRO Index MXRO Index MXRO Index MXRS Index MXRS Index MXRS Index MXRS Index MXRS Index MXRS Index MXRS Index MXRS Index MXRS Index MXSL Index MXSL Index MXSL Index MXSL Index MXSL Index MXSL Index MXSL Index MXSL Index MXSL Index MXKE Index MXKE Index MXKE Index MXKE Index MXKE Index MXKE Index MXKE Index MXKE Index MXKE Index MXMR Index MXMR Index MXMR Index MXMR Index MXMR Index MXMR Index MXMR Index MXMR Index MXMR Index MXMA Index MXMA Index MXMA Index MXMA Index MXMA Index MXMA Index MXMA Index MXNI Index MXNI Index MXNI Index MXNI Index MXNI Index MXNI Index MXNI Index MXNI Index MXNI Index MXTN Index MXTN Index MXTN Index MXTN Index MXTN Index MXTN Index MXTN Index MXTN Index MXTN Index MXWAEM Index MXWAEM Index MXWAEM Index MXBH Index MXBH Index MXBH Index MXBH Index MXBH Index MXBH Index MXBH Index MXBH Index MXBH Index MXJO Index MXJO Index MXJO Index MXJO Index MXJO Index MXJO Index MXJO Index MXJO Index MXJO Index MXKW Index MXKW Index MXKW Index MXKW Index MXKW Index MXKW Index MXKW Index MXKW Index MXKW Index MXLB Index MXLB Index MXLB Index MXLB Index MXLB Index MXLB Index MXLB Index MXLB Index MXLB Index MXOM Index MXOM Index MXOM Index MXOM Index MXOM Index MXOM Index MXOM Index MXOM Index MXOM Index MXBD Index MXBD Index MXBD Index MXBD Index MXBD Index MXBD Index MXBD Index MXBD Index MXBD Index MXLK Index MXLK Index MXLK Index MXLK Index MXLK Index MXLK Index MXLK Index MXLK Index MXLK Index MXVI Index MXVI Index MXVI Index MXVI Index MXVI Index MXVI Index MXVI Index MXVI Index MXVI Index MXPK Index MXPK Index MXPK Index MXPK Index MXPK Index MXPK Index MXPK Index MXPK Index MXBU Index MXBU Index MXBU Index MXBU Index MXBU Index MXBU Index MXUK Index MXUK Index MXUK Index MXUK Index MXUK Index MXQA Index MXQA Index MXQA Index MXQA Index MXAE Index MXAE Index MXAE Index MXAE Index MXTT Index MXTT Index *Newly Added **Newly Added 5/29/2009 12/31/2008 11/28/2008 11/30/2007 5/31/2006 6/29/2001 5/31/2001 11/28/1997 MXAR Index MXCR Index MXCR Index MXCR Index MXCR Index MXCR Index MXCR Index MXCR Index MXCR Index MXEST Index MXEST Index MXEST Index MXEST Index MXEST Index MXEST Index MXEST Index MXEST Index MXLT Index MXLT Index MXLT Index MXKA Index MXKA Index MXKA Index MXKA Index MXKA Index MXKA Index MXKA Index MXKA Index MXRO Index MXRO Index MXRO Index MXRO Index MXRO Index MXRO Index MXRO Index MXRO Index MXRS Index MXRS Index MXRS Index MXSL Index MXSL Index MXSL Index MXSL Index MXSL Index MXSL Index MXSL Index MXSL Index MXKE Index MXKE Index MXKE Index MXKE Index MXKE Index MXKE Index MXKE Index MXKE Index MXMR Index MXMR Index MXMR Index MXMR Index MXMR Index MXMR Index MXMR Index MXMR Index
MXNI Index MXNI Index MXNI Index MXNI Index MXNI Index MXNI Index MXNI Index MXNI Index MXTN Index MXTN Index MXTN Index MXTN Index MXTN Index MXTN Index MXTN Index MXTN Index
MXBH Index MXBH Index MXBH Index MXBH Index MXBH Index MXBH Index MXBH Index MXBH Index MXJO Index MXJO Index MXJO Index MXKW Index MXKW Index MXKW Index MXKW Index MXKW Index MXKW Index MXKW Index MXKW Index MXLB Index MXLB Index MXLB Index MXLB Index MXLB Index MXLB Index MXLB Index MXLB Index MXOM Index MXOM Index MXOM Index MXOM Index MXOM Index MXOM Index MXOM Index MXOM Index
MXLK Index MXLK Index MXLK Index MXLK Index MXVI Index MXVI Index MXVI Index MXVI Index MXVI Index MXVI Index MXVI Index MXVI Index MXPK Index MXBU Index MXBU Index MXBU Index MXBU Index MXBU Index MXBU Index MXBU Index MXBU Index MXUK Index MXUK Index MXUK Index MXUK Index MXUK Index MXUK Index MXUK Index MXUK Index MXQA Index MXQA Index MXQA Index MXQA Index MXQA Index MXQA Index MXQA Index MXQA Index MXAE Index MXAE Index MXAE Index MXAE Index MXAE Index MXAE Index MXAE Index MXAE Index MXTT Index
Figure 5: Aggregate Reclassification Regression Results (1) (2) (3) VARIABLES Thirty-Day Pairwise Correlations Twenty-Day Pairwise Correlations Fifteen-Day Pairwise Correlations
Both MSCI FM or Both MSCI EM 0.219*** 0.221*** 0.228*** (0.00308) (0.00312) (0.00317) Treated 0.178*** 0.188*** 0.183*** (0.0134) (0.0125) (0.0123) Both*Treated -0.251*** -0.255*** -0.259*** (0.0169) (0.0163) (0.0163)
Observations 14,377 15,656 16,707 R-squared 0.276 0.259 0.252 Standard errors in parentheses *** p<0.01, ** p<0.05, * p<0.1
(1) STATA Output
(2) STATA Output
(3) STATA Output
Figure 6: Emerging Market Indexes Regression Results (1) (2) (3) VARIABLES Thirty-Day Pairwise Correlations Twenty-Day Pairwise Correlations Fifteen-Day Pairwise Correlations
Both Indexes in MSCI EM 0.282*** 0.284*** 0.294*** (0.00504) (0.00480) (0.00468) Treated 0.232*** 0.232*** 0.221*** (0.0233) (0.0207) (0.0194) Both*Treated -0.275*** -0.282*** -0.290*** (0.0282) (0.0258) (0.0248)
Observations 5,413 6,455 7,403 R-squared 0.392 0.376 0.368 Standard errors in parentheses *** p<0.01, ** p<0.05, * p<0.1
(1) STATA Output
(2) STATA Output
(3) STATA Output
Figure 7: Frontier Market Indexes Regression Results (1) (2) (3) VARIABLES Thirty-Day Pairwise Correlations Twenty-Day Pairwise Correlations Fifteen-Day Pairwise Correlations
Both Indexes in MSCI FM 0.182*** 0.176*** 0.176*** (0.00382) (0.00402) (0.00422) Treated 0.151*** 0.164*** 0.159*** (0.0161) (0.0154) (0.0156) Both*Treated -0.255*** -0.256*** -0.250*** (0.0209) (0.0208) (0.0215)
Observations 8,964 9,201 9,304 R-squared 0.210 0.184 0.169 Standard errors in parentheses *** p<0.01, ** p<0.05, * p<0.1
(1) STATA Output
(2) STATA Output
(3) STATA Output
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