The role of the S&P/TSX Composite Index constituents in tracking the Canadian equity market

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Shams, Shirin
University of Lethbridge. Faculty of Management
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Lethbridge, Alta. : University of Lethbridge, Faculty of Management
In this study, we examine whether flexibility in stocks addition to and deletion from the S&P/TSX Composite Index enhanced its ability to act as a performance benchmark and represent the Canadian equity market. In May 2002, the first major change happened to the TSE 300 Index and the TSE 300 Index was converted to S&P/TSX Composite Index. Consequently, along with the new inclusion criteria the number of Index’s constituents were not forced to be exactly 300. To compare the Index’s two functions before and after the change, this study utilizes data from the 1992-2011 sample period. Our results suggest that the Index’s returns better replicates the equity market’s returns after May 2002 because the committee were able to add higher performing stocks and delete the poor performing ones. Furthermore, the Index represents the equity market better after the change mainly due to the higher capitalization of the survived stocks.
addition/deletion events , index performance , S&P/TSX Composite Index , TSE 300 Index