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The S&P 500 effect: not such good news in the long run

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  • Daniel H. Cooper
  • Geoffrey Woglom

Abstract

This paper analyzes the effect on a company's stock price when it is added to the S&P 500 Index. A simple theoretical model is developed to show how trading effects and changes to fundamentals should affect the price of S&P500 additions upon announcement and in the long run. This model predicts that a company added to the S&P500 should experience an initial price increase followed by a reversal of this price increase owing to the predicted increased stock price volatility of companies post-addition. All of these effects should be growing over time because of the increasing importance of S&P500 indexed mutual funds. We test the predictions of the model using a sample of 303 S&P500 Index additions between 1978 and 1998. We find results generally consistent with the model, particularly in the most recent period when it appears that the post-addition increase in stock price volatility reverses almost all of the initial price increase.

Suggested Citation

  • Daniel H. Cooper & Geoffrey Woglom, 2002. "The S&P 500 effect: not such good news in the long run," Finance and Economics Discussion Series 2002-48, Board of Governors of the Federal Reserve System (U.S.).
    • Handle: RePEc:fip:fedgfe:2002-48
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    References listed on IDEAS

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    1. De Long, J Bradford & Andrei Shleifer & Lawrence H. Summers & Robert J. Waldmann, 1990. "Noise Trader Risk in Financial Markets," Journal of Political Economy, University of Chicago Press, vol. 98(4), pages 703-738, August.
    2. Kraus, Alan & Stoll, Hans R, 1972. "Price Impacts of Block Trading on the New York Stock Exchange," Journal of Finance, American Finance Association, vol. 27(3), pages 569-588, June.
    3. Dhillon, Upinder & Johnson, Herb, 1991. "Changes in the Standard and Poor's 500 List," The Journal of Business, University of Chicago Press, vol. 64(1), pages 75-85, January.
    4. Pagan, Adrian, 1984. "Econometric Issues in the Analysis of Regressions with Generated Regressors," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 25(1), pages 221-247, February.
    5. Lynch, Anthony W & Mendenhall, Richard R, 1997. "New Evidence on Stock Price Effects Associated with Changes in the S&P 500 Index," The Journal of Business, University of Chicago Press, vol. 70(3), pages 351-383, July.
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    Cited by:

    1. Sascha Wilkens & Jens Wimschulte, 2005. "Price and Volume Effects Associated with 2003’s Major Reorganization of German Stock Indices," Financial Markets and Portfolio Management, Springer;Swiss Society for Financial Market Research, vol. 19(1), pages 61-98, June.
    2. Sónia Sousa & Ana Serra, 2008. "What drives idiosyncratic volatility over time?," Portuguese Economic Journal, Springer;Instituto Superior de Economia e Gestao, vol. 7(3), pages 155-181, December.
    3. Danbolt, Jo & Hirst, Ian & Jones, Edward, 2018. "Gaming the FTSE 100 index," The British Accounting Review, Elsevier, vol. 50(4), pages 364-378.
    4. Houdou Basse Mama & Stefan Mueller & Ulrich Pape, 2017. "What’s in the news? The ambiguity of the information content of index reconstitutions in Germany," Review of Quantitative Finance and Accounting, Springer, vol. 49(4), pages 1087-1119, November.
    5. Khelifa Mazouz & Brahim Saadouni, 2007. "The price effects of FTSE 100 index revision: what drives the long-term abnormal return reversal?," Applied Financial Economics, Taylor & Francis Journals, vol. 17(6), pages 501-510.

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    Keywords

    Stock - Prices; Econometric models;

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