easy · Market Microstructure
A stock is added to a major index. Which of the following describes the likely 'Index Inclusion Effect' observed in the days surrounding the announcement?
- Bid-ask spreads widen sharply as the newly added stock is repriced for higher volatility.
- No price change occurs, since index inclusion is purely administrative and carries no new fundamental information.
- A significant price decrease results from the dilution of the company's existing outstanding shares.
- A significant price increase as index funds are forced to buy the stock regardless of its fundamental value.
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