The S&P 500 Index Effect in Continuous Time: Evidence from Overnight, Intraday and Tick-by-Tick Stock Price Performance

Abstract: The advent of index tracking early in the 1970s and the continuous growth of assets tied to the S&P 500 index have enforced perceptions of the importance of becoming an index-member, due to increased demand by index fund participants for the stocks involved in index composition changes. This study focuses on S&P 500 inclusions and examines the impact of potential overnight price adjustment after the announcement of an S&P 500 index change. We find evidence of a significant overnight price change that diminishes the profits available to speculators although there are still profits available from the first day after announcement until a few days after the actual event. More importantly observing the tick-by-tick stock price performance of the key days of the event window for the first time, we find evidence of consistent trading patterns during trading hours over inclusion event. A separate analysis of two different sub-periods as well as of NASDAQ and NYSE listed stocks allows for a detailed examination of the price and volume effect in continuous time.