The investment universe consists of stocks from the MSCI index for seven major stock markets in Asia: Japan, Singapore, Hong Kong, Korea, Thailand, Malaysia, and Taiwan.
ASSET CLASS: stocks | REGION: China, Emerging Markets, India, Japan | FREQUENCY:
Daily | MARKET: equities | KEYWORD: Arbitrage Opportunities, MSCI Index, Asia
I. STRATEGY IN A NUTSHELL
The strategy focuses on stocks from the MSCI index across seven major Asian markets: Japan, Singapore, Hong Kong, Korea, Thailand, Malaysia, and Taiwan. During each quarterly MSCI index review, the strategy constructs a value-weighted long-short portfolio by going long on added stocks and short on deleted stocks from AD+1 to ED-1, holding positions for the 15-trading day rebalancing interval. Stocks are bought or sold at opening and closing prices according to the rebalancing schedule.
II. ECONOMIC RATIONALE
Index reconstitutions create announcement and execution effects that influence stock prices. In Western markets, these effects are often arbitraged efficiently. In Asian markets, however, index-tracking investors’ attempts to avoid tracking errors can induce temporary mispricing. This generates profitable arbitrage opportunities for other investors who can buy added stocks or short deleted stocks during the rebalancing window, capturing abnormal returns before the market fully adjusts. The study highlights the importance of timing and value-weighted execution in exploiting these opportunities while balancing costs of tracking errors and rebalancing.
III. SOURCE PAPER
Arbitrage Opportunities from MSCI Index Reconstitutions In Asian Stock Markets [Click to Open PDF]
Shuoge Qian, Nanyang Business School, Nanyang Technological University; Xin Chang, Capital University of Economics and Business; Jiang Luo, Advance Capital Partners Pte. Ltd.; Jiaxin Peng, [Affiliation Missing]; Choon Wee Tan, [Affiliation Missing]
<Abstract>
Using the reconstitution of MSCI indices in seven Asian markets from 2006 to 2021, we discover arbitrage opportunities arising from index-tracking funds’ efforts to minimize tracking errors around the dates when index reconstitution changes become effective (i.e., effective dates). We document pronounced abnormal returns and trading volume on the last trading day before the effective date. Arbitrageurs can exploit this predictable pattern of stock price changes and earn sizable abnormal returns if they long the added and short the deleted stocks on the announcement date and close their positions at the end of the day before the effective date. Additional analysis reveals how index-tracking investors and arbitragers trade against each other to shape stock prices and equity-lending activities around MSCI index reconstitutions.
IV. BACKTEST PERFORMANCE
| Annualised Return | 10.1% |
| Volatility | N/A |
| Beta | N/A |
| Sharpe Ratio | N/A |
| Sortino Ratio | N/A |
| Maximum Drawdown | N/A |
| Win Rate | N/A |
