The Price Response to S&P 500 Index Additions and Deletions: Evidence of Asymmetry and a New Explanation

Abstract

We study the price effects of firms added to and deleted from the S&P 500 index and document an asymmetric price response: there is a permanent increase in the price of added firms but no similar decline for deleted firms. These results are at odds with extant explanations of the effects of S&P 500 index changes which imply a symmetric price response to additions and deletions. A possible explanation for asymmetric price effects arises from changes in investor awareness. Results from our empirical tests support the thesis that changes in investor awareness contribute to the asymmetric price effects of S&P 500 index additions and deletions.

Keywords: index changes, S&P 500, index additions, index deletions, price pressure, investor awareness, downward sloping demand curves

JEL Classification: G12, G14