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Gambling on the S&P 500's Gold Seal: New Evidence on the Index Effect

Author

Listed:
  • Chris Brooks

    (ICMA Centre, University of Reading)

  • Konstantina Kappou

    (ICMA Centre, University of Reading)

  • Charles Ward

    (ICMA Centre, University of Reading)

Abstract

This study examines the abnormal returns, trading activity and long term performance of stocks that were added to the S&P 500 Index during the period 1990 to 2002. By using a three-factor pricing model that allows for firm size and value characteristics as well as market risk, we are able to shed new light on the widely observed 'index effect'. We argue that for the years 1990-1997 in particular, firm size mattered in the long-run and firm size effects cannot be captured by a single factor model for abnormal returns. We also find a transitory increase in trading volume between the announcement and a few days after the effective date. The 'seal' of S&P 500 Index membership has very long term effects and inclusion is not an information-free event.

Suggested Citation

  • Chris Brooks & Konstantina Kappou & Charles Ward, 2004. "Gambling on the S&P 500's Gold Seal: New Evidence on the Index Effect," ICMA Centre Discussion Papers in Finance icma-dp2004-04, Henley Business School, University of Reading.
    • Handle: RePEc:rdg:icmadp:icma-dp2004-04
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    File URL: http://www.icmacentre.ac.uk/pdf/discussion/DP2004-05.pdf
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    Citations

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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. J. Coakley & P. Kougoulis & J. C. Nankervis, 2008. "The MSCI-Canada index rebalancing and excess comovement," Applied Financial Economics, Taylor & Francis Journals, vol. 18(16), pages 1277-1287.

    More about this item

    Keywords

    Index effect; S&P 500; market efficiency; price pressure; three-factor model;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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