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S&P 500 inclusions and stock supply

Jan Schnitzler

Journal of Empirical Finance, 2018, vol. 48, issue C, 341-356

Abstract: I provide new evidence of the S&P500 inclusion effect that highlights the importance of stock supply. If excess demand from S&P500-linked capital drives the inclusion effect, it should depend as well on the effective supply of a stock. Standard & Poor’s index methodology gives two distinct features of a stock’s ownership composition a supply interpretation. Both measures significantly predict the cross-sectional size of inclusion returns. Switching to free-floating index weights in 2005 enables a quasi-natural experiment to one proxy and a placebo test to the other. Finally, evidence from the most recent decade indicates that any persistence in the inclusion effect has disappeared.

Keywords: S&P 500 additions; Price pressure; Control ownership; Free-float index weight adjustment; Arbitrage capital; Downward-sloping demand for stocks (search for similar items in EconPapers)
JEL-codes: G12 G14 G32 D40 (search for similar items in EconPapers)
Date: 2018
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Journal of Empirical Finance is currently edited by R. T. Baillie, F. C. Palm, Th. J. Vermaelen and C. C. P. Wolff

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Handle: RePEc:eee:empfin:v:48:y:2018:i:c:p:341-356