demand for stocks in our sample ranges between -3.27 and -0.01, with a median of -0.34. The average elasticity is -0.67 – larger in absolute value than the median because of few stocks whose demand is much more elastic than the rest of the sample (as displayed in Figure 3). When considering the purchases occurring between the announcement and the implementation date (Column 2 in Panel B), the estimated elasticity becomes larger (in absolute value) but still close to the baseline value in Column 3. That is because most inflows materialize on the implementation date. Similarly, estimates do not change much when including also purchases by domestic investors, as very few domestic investors rebalance their portfolios in the direction of the indexes (Column 4 in Panel B).

Our results show that the demand for stocks is particularly inelastic, contrary to the prediction of traditional asset pricing models, such as the CAPM. To illustrate how our estimates relate to previous studies, we calculate the elasticity of each event using inferred flows (as opposed to actual flows) based on conventional methods from the index rebalancing literature. To be precise, we calculate the change in quantities, Equation 1, using both the total AUM benchmarked against the indexes, and the AUM of passive funds only, _i.e._ , _k_ = _{Passive, Total}_ . We combine these changes in quantities with the change in prices to obtain a range of inferred elasticities. The findings are reported in Figure 3 and Table 1, Panel B, columns 5 and 6. The key result is that our baseline elasticity – computed using actual transaction data – is much closer to the elasticity obtained under the assumption that only passive funds rebalance their portfolios in response to index recompositions. Using all AUM benchmarked against a given index tends to overestimate (in absolute value) the elasticity of stock demand curves, much more than using only passively managed assets seems to underestimate this elasticity.<sup>18</sup> Finally, we compare our estimates with the ones from recent literature for the United States using Russell Indexes. Chang et al. (2014) report an average elasticity of -1.5 using the assumption that all investors rebalance, and an elasticity of -0.46 when only passive funds rebalance. Our elasticity estimate, slightly be-

> 18Of course our estimate of the demand elasticity also relies on some assumptions. That is, we focus on foreign flows on the effective date and price changes from announcement to implementation. We replicate the estimation using the change in shares bought by all investors from the announcement to the implementation – considering both foreigners trading in the index direction and domestic investors doing so and obtain a median elasticity of -0.56. We also re-estimate our baseline elasticity but using the change in price only at the announcement date and obtain a median elasticity also of -0.56. This number increases (in absolute value) to -0.59, when we consider the change in shares by all investors and the change in price at the announcement date only. All in all, all of these estimates are close to our baseline one, and much smaller (in absolute value) than the estimated elasticity one would get using the total AUM of funds benchmarked against the indexes.

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