Working Paper: NBER ID: w30748
Authors: Robin Greenwood; Marco C. Sammon
Abstract: The abnormal return associated with a stock being added to the S&P 500 has fallen from an average of 3.4% in the 1980s and 7.6% in the 1990s to 0.8% over the past decade. This has occurred despite a significant increase in the percentage of stock market assets linked to the index. A similar pattern has occurred for index deletions, with large negative abnormal returns on average during the 1980s and 1990s, but only -0.6% between 2010 and 2020. We investigate potential drivers of this surprising phenomenon and discuss the implications for market efficiency.
Keywords: No keywords provided
JEL Codes: G1; G10; G14; G4
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| abnormal return associated with S&P 500 additions has decreased (G14) | decline in the index effect (C43) |
| increase in assets linked to the index (G19) | shift in market dynamics (D49) |
| changes in trading costs and liquidity (G19) | decrease in average price impact of index additions (C43) |
| migration from S&P Midcap index (F29) | decrease in net demand shock from index additions (E39) |
| buying from S&P 500 trackers is offset by selling from S&P Midcap trackers (G19) | smaller net demand shock (E19) |
| predictability of index changes attracts arbitrageurs (G14) | leads to pre-announcement price adjustments (G14) |
| market has become more efficient in accommodating demand shocks (G14) | increased trading volume around index change events (G14) |