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Primary Article

The S&P 500 Effect

Not So Good in the Long Run

Daniel Cooper and Geoffrey Woglom
The Journal of Investing Winter 2003, 12 (4) 62-73; DOI: https://doi.org/10.3905/joi.2003.319569
Daniel Cooper
A research assistant at the Board of Governors of the Federal Reserve System.
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Geoffrey Woglom
Richard S. Volpert '56 Professor of Economics at Amherst College.
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Abstract

This is an analysis of the effect on a company's stock price of adding it to the S&P 500 index. A simple theoretical model is developed to show how trading effects and changes to fundamentals should affect the price of S&P 500 additions upon announcement and in the long run. The model predicts a company added to the S&P 500 should experience an initial price increase and then a reversal of this price increase, owing to the predicted increased stock price volatility of companies post-addition. All these effects should strengthen over time with the increasing importance of S&P 500 indexed mutual funds. Tests of the model using a sample of 303 S&P 500 index additions between 1978 and 1998 produce generally consistent with predictions, particularly in the most recent period, when it appears that a post-addition increase in stock price volatility reverses almost all the initial price increase.

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The Journal of Investing
Vol. 12, Issue 4
Winter 2003
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The S&P 500 Effect
Daniel Cooper, Geoffrey Woglom
The Journal of Investing Nov 2003, 12 (4) 62-73; DOI: 10.3905/joi.2003.319569

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The S&P 500 Effect
Daniel Cooper, Geoffrey Woglom
The Journal of Investing Nov 2003, 12 (4) 62-73; DOI: 10.3905/joi.2003.319569
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