Interesting reading on trading around the S&P 500 Index additions and deletions. http://www2.standardandpoors.com/spf/pdf/index/EventStudy.pdf http://www2.standardandpoors.com/spf/pdf/index/070902pricechanges.pdf
Thanks for the post. I read both studies, both were indeed interesting, but they left me wondering where I could find information on additions and deletions for the indexes. I'm aware there is a re-balancing at the end of this month for the S&P, but don't know where I can find information about what's being shuffled. Do you know where one might find additions and deletions to the indexes as described in the studies? Thanks.
This is a well known and easy arb strategy that can be automated... I've tested a S&P 500 index effect strategy and calculated about 40% annualized abnormal returns (using real time news and price data). The permanent effect is observed on the day following the addition/deletion announcement, and the temporary effect is the abnormal return between the announcement date and effective date. The latter is the result of index fund tracking errors... which essentially absorbs the supply of the arbs. Or vice versa for deletions. I found that the best entry time is the near the close of the first trading day after the announcement. Hold the position until around 10 AM on the effective date. Holding any longer mostly produced negative abnormal returns.