Adaptation of the S&P 500 Index Effect

Abstract

Since 1989, newly added stocks in the S&P 500 Index have been observed to experience an upward price drift during the time between the moment when the index constituency change is first announced to the public and the moment when the index change becomes effective. The literature has shown that this upward price drift results in a positive abnormal return for stocks when they are first added to the S&P 500. This price drift (and the corresponding positive abnormal return), referred to as the S&P game, has historically allowed some stock traders to exploit positive abnormal returns by buying newly added stocks on the announcement date and selling them on the effective date. The S&P game is a clear violation of the notion of market efficiency, but it has been consistently identified in the literature across several decades. The authors examine the degree to which this S&P effect still persists. Consistent with the notion that markets adapt over time, the evidence suggests that the upward price drift between the announcement and effective dates has mostly disappeared in recent years. They find no evidence of a positive price drift between the announcement date and the effective date for newly added stocks from 2010 to 2013. Nearly all of the price impact for a newly added stock occurs prior to the opening of the market on the day immediately following the announcement; afterward, the authors observe that prices of newly added stocks actually tend to drift downward.