Twice a year, AMFI is tasked with categorizing the universe of stocks into “large/mid/small” and funds with specific market-cap mandates are allowed to invest in only the corresponding set of stocks (amfiindia, sebi). We have a report that shows these changes over time (stockviz).
Given the massive flows involved, what is the prospective impact on liquidity as stocks get promoted and demoted between these classes?
We measure illiquidity using Amihud’s (Illiquidity and stock returns, 2002) illiquidity measure ILLIQ.
Between market-cap classes, the differences in liquidity is large enough to warrant a log-scale:
With this large disparity in mind, we can now look at the impact of migrations.
Large-cap Exits
Mid-cap Promotions
Mid-cap Demotions
Small-cap Promotions
It appears that stocks that get promoted from mid-caps to large-caps turn a bit illiquid. Otherwise, most migrations have negligible impact on their forward six-month illiquidity measure.
Code and charts on github.