The Disappearing Index Effect
51 Pages Posted: 13 Dec 2022 Last revised: 22 Dec 2022
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The Disappearing Index Effect
The Disappearing Index Effect
Date Written: December 21, 2022
Abstract
The abnormal return associated with a stock being added to the S&P 500 has fallen from an average of 3.4% in the 1980s and 7.6% in the 1990s to 0.8% over the past decade. This has occurred despite a significant increase in the percentage of stock market assets linked to the index. A similar pattern has occurred for index deletions, with large negative abnormal returns on average during the 1980s and 1990s, but only -0.6% between 2010 and 2020. We investigate the drivers of this surprising phenomenon and discuss the implications for market efficiency.
Keywords: index inclusion, passive ownership, market efficiency
JEL Classification: G14
Suggested Citation: Suggested Citation