Anil Kashyap, Natalia Kovrijnykh, Jian Li, Anna Pavlova, 18 February 2019

A well-known puzzle in economics is that when stocks are added to the S&P 500 index, their prices rise. Using a theoretical framework and empirical evidence, this column shows that this ‘benchmark inclusion subsidy’ arises because asset managers have incentives to hold some of the equity of firms in the benchmark regardless of the risk characteristics of these firms. As a result, asset managers effectively subsidise investments by benchmark firms. As the asset management industry continues to grow, the benchmark inclusion subsidy will only get bigger. 

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