Gambling on the S&P 500's Gold Seal: New Evidence on the Index Effect

44 Pages Posted: 17 May 2004

See all articles by Chris Brooks

Chris Brooks

University of Reading - ICMA Centre

Konstantina Kappou

University of Reading - ICMA Centre

Charles W.R. Ward

University of Reading

Date Written: May 2007

Abstract

This study examines the abnormal returns, trading activity and long term performance of stocks that were added to the S&P 500 Index during the period 1990 to 2002. By using a three-factor pricing model that allows for firm size and value characteristics as well as market risk, we are able to shed new light on the widely observed index effect. We argue that for the years 1990-1997 in particular, firm size mattered in the long-run and firm size effects cannot be captured by a single factor model for abnormal returns. We also find a transitory increase in trading volume between the announcement and a few days after the effective date. The seal of S&P 500 Index membership has very long term effects and inclusion is not an information-free event.

Keywords: Index effect, S&P 500, market efficiency, price pressure, three-factor model

JEL Classification: G10, G14

Suggested Citation

Brooks, Chris and Kappou, Konstantina and Ward, Charles W.R., Gambling on the S&P 500's Gold Seal: New Evidence on the Index Effect (May 2007). Available at SSRN: https://ssrn.com/abstract=531903 or http://dx.doi.org/10.2139/ssrn.531903

Chris Brooks

University of Reading - ICMA Centre ( email )

Whiteknights Park
P.O. Box 242
Reading RG6 6BA
United Kingdom
+44 118 931 82 39 (Phone)
+44 118 931 47 41 (Fax)

Konstantina Kappou (Contact Author)

University of Reading - ICMA Centre ( email )

Whiteknights Park
P.O. Box 242
Reading RG6 6BA
United Kingdom
+44 7793405682 (Phone)
+44 1189314741 (Fax)

Charles W.R. Ward

University of Reading ( email )

ICMA Centre,
Henley Business School
Reading, RG6 6AB
United Kingdom
T: +44 (0)118 378 8239 (Phone)

HOME PAGE: http://www.icmacentre.ac.uk/about_us/academic_staff/professor_charles_ward,

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