The Price Response to S&P 500 Index Additions and Deletions: Evidence of Asymmetry and a New Explanation (.pdf)

Chen, Noronha, and Singal report in a forthcoming JF article that when stocks are dropped from the S&P 500, there is a temporary price decline. However when firms are added, the increase is seemingly permanent. This asymmetry is seemingly counter to most widely held views that demand curves for individual stocks are elastic. The authors suggest that this asymmetry is due to “investor awareness” whereby the investor becomes aware of the stock when it is admitted to the index but investors do not forget about the stock once dropped. [ Annotation]

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