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Article
Publication date: 21 September 2012

Eric Belasco, Michael Finke and David Nanigian

The purpose of this paper is to explore the impact of S&P 500 index fund money flow on the valuations of companies that are constituents of the index and those that are not.

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Abstract

Purpose

The purpose of this paper is to explore the impact of S&P 500 index fund money flow on the valuations of companies that are constituents of the index and those that are not.

Design/methodology/approach

To examine the impact of passive investing on corporate valuations, the authors run panel regressions of price‐to‐earnings ratio on aggregate money flow into S&P 500 index funds and control for various accounting variables that impact price‐to‐earnings ratio. These regressions involve two samples of stocks. The first sample consists of S&P 500 constituents. The second consists of large‐cap stocks that are not constituents of the S&P 500. The authors also run a set of separate regressions with price‐to‐book ratio rather than price‐to‐earnings ratio as the dependent variable.

Findings

It is found that the valuations of S&P 500 constituents increased by 139 to 167 basis points relative to nonconstituents, depending on valuation metric, due to S&P 500 index fund money flow when evaluated at mean values of money flow and valuation metrics. The valuations of firms within the S&P 500 index respond positively to changes in S&P 500 index fund money flow while the valuations of firms outside the index do not. Additionally, the impact of money flow on valuations persists the month after the flow occurs, suggesting that the impact does not dissipate over time.

Practical implications

Mispricings among individual stocks arising from index fund investing may reduce the allocative efficiency of the stock market and distort investors' performance evaluations of actively managed funds.

Originality/value

The paper is the first to explore the long‐run relationship between S&P 500 index fund money flow and corporate valuations.

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Article
Publication date: 9 November 2015

Allen Michel, Jacob Oded and Israel Shaked

The cornerstone of Modern Portfolio Theory with implications for many aspects of corporate finance is that reduced correlation among assets and reduced standard deviation…

Abstract

Purpose

The cornerstone of Modern Portfolio Theory with implications for many aspects of corporate finance is that reduced correlation among assets and reduced standard deviation are key elements in portfolio risk reduction. The purpose of this paper is to analyze the conditional correlation and standard deviation of a broad set of indices with the S & P 500 conditioned on market performance.

Design/methodology/approach

The authors examined volatility and correlation for a set of indices for a 19-year period based on weekly data from July 2, 1993 to June 30, 2012. These included the NASDAQ, MSCI EAFE, Russell 1000, Russell 2000, Russell 3000, Russell 1000 Growth, Russell 1000 Value, Gold, MSCI EM and Dow Jones UBS Commodity. The data for the Wilshire US REIT, Barclays Multiverse, Multiverse 1-3, Multiverse 3-5 and Multiverse 10+ became available starting July 2, 2002. For these indices the authors used weekly data from July 1, 2002 through June 30, 2012. For the iBarclays TIPS, the authors used weekly data from the time of availability, namely, for the period December 12, 2003 through June 29, 2012.

Findings

The findings demonstrate that both the conditional correlations and standard deviations vary as a function of market performance. Moreover, the authors obtain a U-shape distribution of correlations conditioned on market performance for equity indices, such as NASDAQ, as well as for the Wilshire REIT. Namely, correlations tend to be high when market returns are at low or high extremes. For more typical market performance, correlations tend to be low. A modified U-shape is found for bond indices and the Dow Jones UBS Commodity Index. Interestingly, the correlation between gold and the S & P 500 is unrelated to the return on the S & P.

Originality/value

While it has been observed that asset classes move together, this paper is the first to systematically analyze the nature of these asset class correlations.

Details

Managerial Finance, vol. 41 no. 11
Type: Research Article
ISSN: 0307-4358

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Article
Publication date: 16 August 2011

Akihiro Fukushima

The purpose of this paper is to propose two hybrid forecasting models which integrate available ones. A hybrid contaminated normal distribution (CND) model accurately…

Abstract

Purpose

The purpose of this paper is to propose two hybrid forecasting models which integrate available ones. A hybrid contaminated normal distribution (CND) model accurately reflects the non‐normal features of monthly S&P 500 index returns, and a hybrid GARCH model captures a serial correlation with respect to volatility. The hybrid GARCH model potentially enables financial institutions to evaluate long‐term investment risks in the S&P 500 index more accurately than current models.

Design/methodology/approach

The probability distribution of an expected investment outcome is generated with a Monte Carlo simulation. A taller peak and fatter tails (kurtosis), which the probability distribution of monthly S&P 500 index returns contains, is produced by integrating a CND model and a bootstrapping model. The serial correlation of volatilities is simulated by applying a GARCH model.

Findings

The hybrid CND model can simulate the non‐normality of monthly S&P 500 index returns, while avoiding the influence of discrete observations. The hybrid GARCH model, by contrast, can simulate the serial correlation of S&P 500 index volatilities, while generating fatter tails. Long‐term investment risks in the S&P 500 index are affected by the serial correlation of volatilities, not the non‐normality of returns.

Research limitations/implications

The hybrid models are applied only to the S&P 500 index. Cross‐sectional correlations among different asset groups are not examined.

Originality/value

The proposed hybrid models are unique because they combine available ones with a decision tree algorithm. In addition, the paper clearly explains the strengths and weaknesses of existing forecasting models.

Details

The Journal of Risk Finance, vol. 12 no. 4
Type: Research Article
ISSN: 1526-5943

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Article
Publication date: 31 July 2009

Karel Hrazdil

Many papers have argued that there are long‐run downward‐sloping demand curves (LRDDC) for stocks. The purpose of this paper is to analyze this hypothesis using a new…

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1012

Abstract

Purpose

Many papers have argued that there are long‐run downward‐sloping demand curves (LRDDC) for stocks. The purpose of this paper is to analyze this hypothesis using a new, unique, and ostensibly information‐free event: the re‐weighting of the Standard & Poor (S&P) 500 index from market based to free‐float based, which involves a significant shift in supply that, under the LRDDC, should result in significant and permanent price movements.

Design/methodology/approach

Event study methodology is used to examine abnormal returns and trading activity around the free‐float weight implementation dates for S&P 500 firms with various investable weight factors.

Findings

As a result of S&P 500 index re‐weighting, affected stocks experience statistically significant excess returns of −1.54 percent during the event week. This return is reversed during the following 30 days as trading volume returns to normal levels. These results are contrary to previous studies that analyze ostensibly informational events and/or different exchanges.

Research limitations/implications

Results of this study indicate that arbitrage appears to be effective in eliminating a long‐term mispricing, which challenges the validity of the LRDDC hypothesis.

Originality/value

This study contributes to the body of literature on the S&P 500 index firms by providing supporting evidence for the price‐pressure hypothesis.

Details

Managerial Finance, vol. 35 no. 9
Type: Research Article
ISSN: 0307-4358

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Article
Publication date: 9 March 2012

Rashiqa Kamal, Edward R. Lawrence, George McCabe and Arun J. Prakash

There is empirical evidence that a firm's addition to S&P 500 results in significant abnormal returns and an increase in a stock's liquidity. The purpose of this paper is…

Abstract

Purpose

There is empirical evidence that a firm's addition to S&P 500 results in significant abnormal returns and an increase in a stock's liquidity. The purpose of this paper is to argue that changes in the information environment after the year 2000 due to the implementation of Regulation Fair Disclosure (FD), decimalization and Sarbanes Oxley Act, should result in reduced abnormal returns in the post‐2000 period.

Design/methodology/approach

The authors compare the abnormal returns and liquidity changes around the announcement day of firm's addition to S&P 500 in the pre‐ and post‐2000 periods. Univariate and multivariate tests are used to control for factors that research shows affect the abnormal returns around additions to S&P 500.

Findings

It is found that the reduction in informational asymmetry in the post‐2000 period has resulted in a significant decrease in the abnormal return on the announcement day of additions to S&P 500 index and changes in the stock's liquidity in the post announcement period are now marginal.

Originality/value

Existing literature related to changes in the abnormal returns around additions to S&P 500 does not account for changes in the information environment in the two sub periods, pre‐ and post‐2000. The results may have implications for studies related to additions to S&P 500 where the sample period spans over the two sub periods.

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Article
Publication date: 12 October 2012

Gonul Colak

The purpose of this paper is to investigate the initial public offerings (IPOs) of the firms that are eventually included in one of the S&P 400, the S&P 500, or the S&P

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1232

Abstract

Purpose

The purpose of this paper is to investigate the initial public offerings (IPOs) of the firms that are eventually included in one of the S&P 400, the S&P 500, or the S&P 600 Indices. Do these firms have very different IPO features than the rest of the IPOs?

Design/methodology/approach

The control sample is formed of IPOs that are not included in the corresponding index, and the IPOs that end up in each S&P index are compared to this control sample. Logistic regressions are utilized to estimate the odds of inclusion into one of these indices.

Findings

The author finds that the IPO features, such as underpricing, offer price, underwriter's reputation, venture capital presence, and so on, are found to be substantially different for the index samples. The index firms are found to be “superstars” that deliver extremely high long‐run returns between their IPO date and their index inclusion date. The above results suggest that the quality of index firms has a persistent component to it that can be detected even during the IPO process. After estimating the determinants of the index inclusion, the author discovers that factors implying lower asymmetric information about firm's business (such as, the firm being a spinoff, or being certified by a venture capitalist or a prestigious underwriter, etc.) increase its odds of inclusion.

Originality/value

The paper proposes and tests two new hypotheses related to inclusion into an S&P index. Discoveries made in this paper can help someone recognize which IPOs could become “superstars” that end up in an S&P index.

Details

Managerial Finance, vol. 38 no. 12
Type: Research Article
ISSN: 0307-4358

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Book part
Publication date: 25 March 2010

Eric C. Lin

When a stock is added into the S&P 500 Index, it in effect becomes cross-listed in the Index derivative markets. When index-based trading strategies such as index

Abstract

When a stock is added into the S&P 500 Index, it in effect becomes cross-listed in the Index derivative markets. When index-based trading strategies such as index arbitrage are executed, the component stocks are directly affected by such trading. We find increased volatility of daily returns, plus increased trading volume for the underlying stocks. Utilizing a list of S&P 500 Index composition changes over the period September 1976 to December 2005, we study the market-adjusted volume turnover and return variance of the stocks added to and deleted from the Index. The results indicate that after the introduction of the S&P 500 Index futures and options contracts, stocks added to the S&P 500 experience statistically significant increase in both trading volume and return volatility. Both daily and monthly return variances increase following index inclusion. When stocks are removed from the index, though, neither volatility of returns nor trading volume experiences any significant change. So, we have new evidence showing that Index inclusion changes a firm's return volatility, and supporting the destabilization hypothesis.

Details

Research in Finance
Type: Book
ISBN: 978-1-84950-726-4

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Article
Publication date: 1 November 2011

John M. Geppert, Stoyu I. Ivanov and Gordon V. Karels

The purpose of this paper is to examine the shocks to firm's beta around the event of addition or deletion from the S&P 500 index.

Abstract

Purpose

The purpose of this paper is to examine the shocks to firm's beta around the event of addition or deletion from the S&P 500 index.

Design/methodology/approach

The total derivative of beta and Campbell and Vuolteenaho decomposition of beta methodologies are used, on monthly and daily basis, to examine the behavior of beta around the event.

Findings

Results show a significant increase in correlations of the event firms' returns and the market proxy returns and cash‐flow betas, and decrease in discount‐rate betas for added firms and the opposite effects for deleted firms. Robustness tests indicate that the total derivative changes effects are typical for the event firms industry but that the cash‐flow correlation changes are specific to the firm. These findings suggest that addition or deletion from the S&P 500 index is not an information free event.

Research limitations/implications

The Campbell and Vuolteenaho methodology has limitations – it is conditional on the selection of state variables. In future research it would be beneficial to use different state variables in the beta decomposition framework. Another relevant question for a future research is: what are the effects of the event on the Fama‐French factor model loadings?

Originality/value

The paper's findings contribute to the ongoing debate in the literature of the information hypothesis for addition or deletion from the S&P 500 index.

Details

Review of Accounting and Finance, vol. 10 no. 4
Type: Research Article
ISSN: 1475-7702

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Article
Publication date: 20 April 2010

Karel Hrazdil

The purpose of this paper is to directly examine the information hypothesis of S&P 500 index inclusion announcements by investigating the degree to which information…

Abstract

Purpose

The purpose of this paper is to directly examine the information hypothesis of S&P 500 index inclusion announcements by investigating the degree to which information beyond Standard & Poor's eight stated criteria enters the inclusion decision.

Design/methodology/approach

Isolating a sample of S&P 500 additions and their eligible candidates during 1987‐2004, this paper employs logistic analysis that identifies factors ex post beyond the stated criteria that help distinguish the type of information that influences the final selection decision and that is arguably priced at the inclusion announcements.

Findings

The evidence indicates that, when choosing among new S&P 500 candidates, the S&P's committee relies primarily on publicly available information related to enterprise risk and historical performance. Material, private insight into future value‐relevant information plays at most a small part in the selection.

Research limitations/implications

The results suggest that index additions convey limited new information about added firms. Studies analysing index additions should start with the presumption that index inclusion announcements are information‐free events, and focus on the consequences of index inclusions such as liquidity, awareness or arbitrage risk, in their relation to index premia.

Originality/value

The results indicate that the previous evidence supporting the information hypothesis using the S&P 500 inclusions is not compelling.

Details

Managerial Finance, vol. 36 no. 5
Type: Research Article
ISSN: 0307-4358

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Article
Publication date: 31 January 2011

Chih‐Hsiang Chang, Hsin‐I Cheng, I‐Hsiang Huang and Hsu‐Huei Huang

The purpose of the paper is to investigate the price interrelationship between the Taiwanese and US financial markets.

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1240

Abstract

Purpose

The purpose of the paper is to investigate the price interrelationship between the Taiwanese and US financial markets.

Design/methodology/approach

The trivariate GJR‐GARCH (1,1) model and event study were employed to investigate volatility asymmetry and overreaction phenomenon, respectively.

Findings

The empirical results show that return volatility reveals the asymmetric phenomenon, and the holding period returns on US index futures from the opening of the US index futures electronic trading to the opening of the Taiwanese stock market are an important reference for investors in the Taiwanese stock market. Additionally, the paper presents an overreaction of the Taiwan Stock Exchange Capitalization Weighted Stock Index to a drastic price rise of E‐min NASDAQ 100 Index futures at the opening of the Taiwanese stock market.

Research limitations/implications

This paper deletes the observations arising from the different national holidays of the USA and Taiwan, to have the same number of observations in both markets, which might contaminate the empirical results.

Practical implications

Investors in the Taiwanese stock market tend to pay more attention to the fluctuations in the share prices of high‐technological companies in the USA.

Originality/value

Most of the previous studies regarding price transmission between the Taiwanese and US stock markets focused mainly on the Taiwanese market reactions to the overnight returns of the US market. This paper enlarges the current field by examining the lead‐lag relationship, the volatility asymmetry, and the overreaction phenomenon between the Taiwanese and US financial markets according to the most updated US stock index information.

Details

Managerial Finance, vol. 37 no. 1
Type: Research Article
ISSN: 0307-4358

Keywords

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