Price and Volume Effects Associated with Changes in the S&P 500 List: New Evidence for the Existence of Price Pressures

TLDR

Price pressures from large transactions are hard to detect when those trades convey new information, but changes in the S&P 500 composition—unlikely to signal future prospects—provide a clean setting to study such pressures. The study aims to investigate whether price and volume changes around S&P 500 list adjustments reveal price pressures. It does so by examining price and volume data surrounding additions and deletions in the S&P 500 index. Immediately after an addition, prices rise by more than 3 % and the gain is almost fully reversed within two weeks.

Abstract

ABSTRACT Attempts to identify price pressures caused by large transactions may be inconclusive if the transactions convey new information to the market. This problem is addressed in an examination of prices and volume surrounding changes in the composition of the S&P 500. Since these changes cause some investors to adjust their holdings of the affected securities and since it is unlikely that the changes convey information about the future prospects of these securities, they provide an excellent opportunity to study price pressures. The results are consistent with the price‐pressure hypothesis: immediately after an addition is announced, prices increase by more than 3 percent. This increase is nearly fully reversed after 2 weeks.