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S&P 500 Inclusions and Stock Supply

53 Pages Posted: 12 Mar 2016 Last revised: 7 Jun 2017

Jan Schnitzler

VU University Amsterdam - Faculty of Economics and Business Administration; Tinbergen Institute - Tinbergen Institute Amsterdam (TIA)

Date Written: May 31, 2017

Abstract

I provide new evidence of the S&P500 inclusion effect that highlights the importance of stock supply. If excess demand from S&P500-linked capital drives the inclusion effect, it should depend as well on the effective supply of a stock. Standard & Poor’s index methodology gives two distinct features of a stock’s ownership composition a supply interpretation. Both measures significantly predict the cross-sectional size of inclusion returns. Switching to free-floating index weights in 2005 enables a quasi-natural experiment to one proxy and a placebo test to the other. Finally, evidence from the most recent decade indicates that any persistence in the inclusion effect has disappeared.

Keywords: S&P 500 additions, price pressure, control ownership, free-float index weight adjustment, arbitrage capital, downward-sloping demand for stocks

JEL Classification: G12, G14, G32, D40

Suggested Citation

Schnitzler, Jan, S&P 500 Inclusions and Stock Supply (May 31, 2017). Available at SSRN: https://ssrn.com/abstract=2746479

Jan Schnitzler (Contact Author)

VU University Amsterdam - Faculty of Economics and Business Administration ( email )

De Boelelaan 1105
Amsterdam, 1081HV
Netherlands

Tinbergen Institute - Tinbergen Institute Amsterdam (TIA) ( email )

Gustav Mahlerplein 117
Amsterdam, 1082 MS
Netherlands

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