Arbitrage erodes the profitability of exploiting the index inclusion anomaly

Evidence

In recent years, however, the “index inclusion” anomaly seems to have diminished considerably (Cusick 2001) as the familiar process of identification, exploitation, and eventual attenuation or elimination takes hold. For example, analysis by the investment bank J. P. Morgan suggests that in the late 1990s and in 2000 it was fairly reliably profitable to buy stock if it seemed probable that a company might be added to the United Kingdom’s leading stock index, the FTSE (Financial Times -Stock Exchange) 100, while selling those companies at risk of being deleted. Since 2000, however, the strategy’s profitability “has been eroded as it has become increasingly arbitraged” (Loeys and Fransolet 2004, p. 16). — Donald MacKenzie, An Engine, Not a Camera, 462

Categorization

• XREF: Concrete example of Mackenzie’s larger performativity frame — identification, exploitation, attenuation is the standard ‘knowledge loop’ the book develops. — connects to: Market microstructure shapes whether arbitrage opportunities persist or vanish — Donald MacKenzie & Yuval Millo, Constructing a Market, Performing Theory, 94; Index fund growth itself created the S&P 500 inclusion price anomaly. — Donald MacKenzie, An Engine, Not a Camera: How Financial…, 458; The index inclusion anomaly undermines the advice to invest in index funds — Donald MacKenzie, An Engine, Not a Camera: How Financial…, 461 (+5 more)

Broader Connections

• Arbitrage enforces a real link that anchors derivatives to underlying assets #complicates (0.75) — Donald MacKenzie, An Engine, Not a Camera, 781