The Mysterious Growing Value of S&P 500 Membership
AbstractThe efficient markets hypothesis implies that passive indexing should generate as high a return as active fund management. Indexing has been a very successful strategy. We document a large value premium in the average q ratios of firms in the S&P 500 index relative to the q ratios of other similar firms that appears in the mid 1980s and grows in step with the growth of indexing. Passive investment strategies that require the purchase of the particular 500 stocks in this index increase demand for those stocks and so push up their prices. In short, indexing induces downward sloping demand curves for stocks in the index. For reasons that are not fully clear, arbitrageurs apparently do not correct this overvaluation.
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Date of creation: Dec 2001
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- G0 - Financial Economics - - General
This paper has been announced in the following NEP Reports:
- NEP-FMK-2001-12-19 (Financial Markets)
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