Abstract

In late 1981, we first noticed that stocks appear to rise appreciably on the date of addition to the Standard & Poor’s 500 Stock Index. A cursory examination of prior behavior suggested that this pattern had existed for some time. The pattern persisted and, indeed, was sufficiently powerful that an investor could have reaped gains above and beyond transaction costs during these years. Consequently, this phenomenon is a worthy topic for research.

In formally testing this phenomenon, we posited three hypotheses:

1. Additions to the S&P 500 are accompanied by an immediate and sustained rise in stock price.

2. This rise is not attributable to a rise in the market at large, as represented by the S&P 500 stock index.

3. This increase cannot be accounted for by a beta effect in those stocks added to the index.

We constructed corresponding hypotheses for deletions from the S&P 500:

1. Issues deleted from the S&P 500 face an immediate and sustained drop in price, effective as of the date of deletion.

2. This price move is not accounted for by moves in the market.

3. This drop price cannot be accounted for by beta effects of the deleted stock from the index.