easy · Market Microstructure adverse-selection
A stock is added to the S&P 500. An 'Index Inclusion Effect' is observed.
What is the typical microstructure explanation for the price increase prior to inclusion?
- Anticipatory traders buy in front of the mandatory demand from index-tracking funds.
- The company's fundamental value has increased because its cost of capital dropped.
- Dealers widen spreads to prevent people from buying the stock.
- Retail investors like the company more now.
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