Attempts to identify price pressures cause by large transactions may be inconclusive if the transactions convey new information to the market. This problem is addressed in an examination of prices and volume surrounding changes in the composition of the S&P 500. Since these changes cause some investors to adjust their holding of the affected securities and since it is unlikely that the changes covey information about the future prospects of these securities, they provide an excellent opportunity to study price pressures. The results are consistent with the price-pressure hypothesis: immediately after an addition is announced, prices increase by more than 3 percent . This increase is nearly fully reversed after 2 weeks.
Last revised 8/5/96.