On the behavior of S&P 500 index premium since the 2008 recession

Abstract

Prior research has indicated a clear relationship between index inclusion and stock returns; a phenomenon known as index premium. Various research papers have attributed inclusion in the S&P 500 index an additional price increase for the new member firms and a negative price return for the firms that are removed from the index. Index premium has been explained by the increasing share of passive investment management and index investing in the larger wealth management landscape. Upon the addition of the firm in the index ETFs and other funds that mimic the index start loading up the firm’s stock which shifts the demand curve in the market and results in significant price changes. The paper tries to provide an empirical analyses of index investing and the price impact of index investing on stocks. The paper finds that for the time period of 2008 to 2021, the index premium of S&P 500 index has been none-existent, meaning there is no clear relationship between index additions and abnormal price returns. This research focuses of the on the S&P 500 index additions following the 2008 crisis, thus index deletions have been left out.