The addition and deletion effects of the Standard & Poor's 500 index on both stock and option markets.
Item
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Title
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The addition and deletion effects of the Standard & Poor's 500 index on both stock and option markets.
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Identifier
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AAI3127924
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identifier
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3127924
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Creator
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Sui, Libo.
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Contributor
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Adviser: Nusret Cakici
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Date
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2004
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Language
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English
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Publisher
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City University of New York.
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Subject
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Economics, Finance
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Abstract
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The S&P 500 index is one of the most widely tracked indices by investors who wish to remain diversified. Since October 1989, Standard & Poor allows approximately 5 days of trading between the announcement date and the change date. This study investigated both equity and option markets behaviors for firms added to or deleted from the S&P 500 index.;In the equity part of this study, I used the underlying stock markets data to analyze the post-1989 market behavior of index changes. I examined price and volume history for firms added to or deleted from the S&P 500 index from January 1990 through December 2002. I presented evidence against the down-ward sloping long-run demand curve hypothesis and offered a new explanation for the S&P 500 addition and deletion effect. I revealed the dynamic evolution of this effect from 1990 to 2002. I showed how human behaviors such as risk aversion and irrationality can influence market efficiency in the short-run. I also focused my research on the dynamic evolution of this effect from 1990 to 2002, which indicates markets are becoming more efficient.;This study also investigated option markets behavior. As is widely known, option markets provide a rich source of information for studying market sentiment. In this study, I presented the behavior of option markets of S&P 500 index changes for the first time. I found evidence supporting the liquidity hypothesis and information hypothesis from the option side. I derived the mean implied risk-neutral probability density function to show the option market reactions. I found that Standard & Poor prefers to delete stocks which have left-shift implied RNDs and add stocks which have right-shift implied RNDs. According to the implied RNDs, I found that the difference between addition and deletion groups exists even before the information is released. Markets have positive expectations for addition group stocks and negative expectations for deletion group stocks even before the addition and deletion information is known. I also found evidence of active arbitrage activities and heavy inside trading activities for the index changes. This is the first study focusing on the option markets of those addition and deletion effects.
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Type
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dissertation
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Source
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PQT Legacy CUNY.xlsx
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degree
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Ph.D.
