The Disappearing Index Effect

Abstract

The abnormal return associated with a stock being added to the S&P 500 has fallen from an average of 7.4% in the 1990s to less than 1% over the past decade. This has occurred despite a significant increase in the share of stock market assets linked to the index. A similar pattern has occurred for index deletions, with large negative abnormal returns during the 1990s, but only 0.1% between 2010 and 2020. We investigate the drivers of this surprising phenomenon and discuss implications for market efficiency. Finally, we document a similar decline in the index effect among other families of indices.

JEL Classification: G14