Abstract
We examine the trades of index funds and other institutions around S&P 500 index additions. We find index funds begin rebalancing their portfolios with the announcement of composition changes and do not fully establish their positions until weeks after the effective date. Trading away from the effective date is more prevalent for stocks with lower levels of liquidity and among large index funds, which is consistent with index funds accepting higher tracking error in order to reduce the price impact of their trades. Small and mid-cap funds provide liquidity to index funds around additions, and added stocks with a greater proportion of these natural liquidity providers experience lower inclusion returns.
| Original language | English |
|---|---|
| Pages (from-to) | 605-624 |
| Number of pages | 20 |
| Journal | Journal of Financial Markets |
| Volume | 14 |
| Issue number | 4 |
| DOIs | |
| State | Published - Nov 2011 |
Keywords
- Index funds
- Price pressure
- S&P 500 index additions
- Strategic trading
- Tracking error
ASJC Scopus subject areas
- Finance
- Economics and Econometrics