The Index Effect: Evidence from the Option Market

53 Pages Posted: 7 Jan 2021

See all articles by Fabian Hollstein

Fabian Hollstein

Saarland University

Chardin Wese Simen

University of Liverpool Management School

Date Written: January 7, 2021

Abstract

We document a significantly positive response of delta-hedged option positions on companies entering or leaving the S&P 500 index. Our findings (i) hold for both call and put options, (ii) are robust to placebo- and risk-adjustments, and (iii) are stronger for companies that are likely subject to more demand pressure from stock index investors. The inclusion effect is permanent, while the exclusion effect is transitory. We explore various mechanisms to explain these results, including leading theories of benchmarking, investor recognition, noise trading, and dispersion trading. We find that these explanations cannot individually account for all our novel results.

Keywords: G12, G11, G17

JEL Classification: Delta-Hedged Options, Event Study, Index Effect, Placebo Group

Suggested Citation

Hollstein, Fabian and Wese Simen, Chardin, The Index Effect: Evidence from the Option Market (January 7, 2021). Available at SSRN: https://ssrn.com/abstract=3762051 or http://dx.doi.org/10.2139/ssrn.3762051

Fabian Hollstein

Saarland University ( email )

Campus
Saarbrucken, Saarland D-66123
Germany

Chardin Wese Simen (Contact Author)

University of Liverpool Management School ( email )

Management School
University of Liverpool
Liverpool, L69 7ZH
United Kingdom

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