UiS Working Papers in Economics and Finance,
University of Stavanger

Abstract: A growing body of evidence suggests that assets included in market indexes such as the S&P 500 trade at a premium relative to other assets. In this paper we look for evidence of such an index inclusion premium in a carefully controlled laboratory experiment. Our environment involves three assets and an Exchange Traded Fund (ETF) index asset. We model Authorized Participants (APs) as bots that create and redeem ETF shares by scanning the order books of the underlying assets. In one treatment, all three assets are included in the ETF index asset. In a second treatment, one of the three assets is excluded from the ETF index and is replaced by a second unit of one of the included assets; the included and excluded assets have identical fundamental values enabling a clean test of whether or not there exists an index inclusion premium. We consider a further variant of the excluded asset treatment where short-selling is allowed. We find that: (i) inclusion of an asset in the ETF index results in a substantial index premium, (ii) this result is tied to an order imbalance which arises when an identical asset is excluded from the index, and (iii) the premium and order imbalance persist even if short-selling is allowed.

Keywords: Index Inclusion; ETF; Experimental Finance

JEL-codes: G10; G20

Language: English

32 pages, March 22, 2022

Full text files

uis_wps_2022_02_duffy_friedman_rabanal_rud.pdf  Full text

Download statistics

• University of Stavanger
• Home page for this series

Questions (including download problems) about the papers in this series should be directed to Bernt Arne Odegaard ()
Report other problems with accessing this service to Sune Karlsson ().

This page generated on 2024-02-05 17:13:43.