Index fund growth itself created the S&P 500 inclusion price anomaly.

Evidence

Furthermore, one practical application of efficient-market theory, index funds, seems to have created an anomaly, rather than identifying a pre-existing anomaly. The composition of the S&P 500 and similar indices is not fixed. Periodically, firms are added to and deleted from them, because of mergers and bankruptcies and to reflect changes in the market values of corporations and in the overall makeup of the stock market. From an efficient-market viewpoint, the inclusion of a corporation in an index or its deletion from it should not affect the price of its stock: it seems to convey no information about the corporation that was not previously known. … However, Andrei Shleifer, who was to become a leader of behavioral finance, found that from 1976 to 1983 the inclusion of a stock in the S&P 500 index was associated with an average rise in its price on the day of the announcement of its inclusion of just under 3 percent (Shleifer 1986, p. 582). The effect survived its identification: between 1976 and 1996, the average increase was 3.5 percent. To take an extreme case, the price of stock of AOL (America Online) went up by 18 percent when its inclusion in the S&P 500 was announced (Shleifer 2000, p. 22). — Donald MacKenzie, An Engine, Not a Camera, 458

Categorization

• XREF: This is the cleanest possible case of performativity — the instrument (index funds) creates the anomaly it then trades on. Directly instantiates the book’s core thesis. — connects to: Index-fund growth created an informationally-inefficient price anomaly its own theory rejects — Donald MacKenzie, An Engine, Not a Camera: How Financial…, 1152; Arbitrage erodes the profitability of exploiting the index inclusion anomaly — Donald MacKenzie, An Engine, Not a Camera: How Financial…, 462; Widely adopted portfolio insurance would amplify market price movements — Donald MacKenzie, An Engine, Not a Camera: How Financial…, 809
• SEED: Essay angle: index-fund inclusion as a self-fulfilling prophecy where the efficient-market tool manufactures its own inefficiency.

Broader Connections

• Index-fund growth created an informationally-inefficient price anomaly its own theory rejects #expands (0.95) — Donald MacKenzie, An Engine, Not a Camera, 1152
• Widely adopted portfolio insurance would amplify market price movements #complicates (0.72) — Donald MacKenzie, An Engine, Not a Camera, 809
• Arbitrage erodes the profitability of exploiting the index inclusion anomaly #complicates (0.70) — Donald MacKenzie, An Engine, Not a Camera, 462