Strategic trading by index funds and liquidity provision around S&P 500 index additions
AbstractWe examine the trades of index funds and other institutions around S&P 500 index additions. We find index funds begin rebalancing their portfolios with the announcement of composition changes and do not fully establish their positions until weeks after the effective date. Trading away from the effective date is more prevalent for stocks with lower levels of liquidity and among large index funds, which is consistent with index funds accepting higher tracking error in order to reduce the price impact of their trades. Small and mid-cap funds provide liquidity to index funds around additions, and added stocks with a greater proportion of these natural liquidity providers experience lower inclusion returns.
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Bibliographic InfoArticle provided by Elsevier in its journal Journal of Financial Markets.
Volume (Year): 14 (2011)
Issue (Month): 4 (November)
Contact details of provider:
Web page: http://www.elsevier.com/locate/finmar
S& P 500 index additions Index funds Tracking error Price pressure Strategic trading;
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