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

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.