The S&P 500 index inclusion effect: Evidence from the options market

Abstract

This paper employs forward‐looking information from the options market to shed light on the comovement implications of S&P 500 index inclusion events over the 1997–2020 period. To this end, we test if forward‐looking implied betas impound significant pre‐inclusion information that is not embedded in historical betas. The empirical results show that the increase in post‐inclusion implied betas is significantly smaller than the corresponding increase in historical or hybrid betas. In most cases, changes in implied betas show no evidence of excess comovement after S&P 500 index inclusion. Our findings suggest that added stocks experience changes prior to the index addition announcement and this leads to the ‘index inclusion effect’ reported to the literature.