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

45 Pages Posted: 18 Sep 2003

See all articles by Honghui Chen

Honghui Chen

Department of Finance, University of Central Florida

Vijay Singal

Virginia Tech

Gregory Noronha

University of Washington, Tacoma - Milgard School of Business

Date Written: June 2003

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

Suggested Citation

Chen, Honghui and Singal, Vijay and Noronha, Gregory, The Price Response to S&P 500 Index Additions and Deletions: Evidence of Asymmetry and a New Explanation (June 2003). Available at SSRN: https://ssrn.com/abstract=427001 or http://dx.doi.org/10.2139/ssrn.427001

Honghui Chen

Department of Finance, University of Central Florida ( email )

PO Box 161400
Orlando, FL 32816
United States
407-823-0895 (Phone)

Vijay Singal (Contact Author)

Virginia Tech ( email )

Blacksburg, VA 24061
United States
5402317750 (Phone)

Gregory Noronha

University of Washington, Tacoma - Milgard School of Business ( email )

1900 Commerce Street
Campus Box 358420
Tacoma, WA 98402-3100
United States

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