Does mispricing explain returns following addition to the S&P 500?

Sammanfattning: This study investigates the relationships between mispricing and returns following addition to the S&P 500. We find evidence that the index premium is demand-driven, resulting in mispricing that is subsequently exploited by rational investors. We find that index premia are temporary, undergoing a full reversal within 20 days. Using a novel approach to estimating mispricing, we find that post-addition returns are negatively related to mispricing. Furthermore, the average degree of mispricing decreases following addition, lending support to the theory that increased scrutiny due to addition to the S&P 500 aids investors in identifying and exploiting pricing inefficiencies.