M&M to replace Hero Honda in BSE Sensex-30 index
Rediff.com reports: Utility vehicles manufacturer Mahindra & Mahindra will replace Hero Honda in the country’s benchmark index Sensex from July 9.
Is this a trading opportunity? First, check out my previous post - NSE Study: Price and Volume Effects of Nifty-50 Reorganizations. It talks about a research study published by the NSE that found the following: Stock prices, on average, increase (decrease) significantly on the effective day of inclusion (exclusion) for the Nifty index.
I could not find a similar study for the BSE Sensex-30 index, but if we assume a similar effect, the trading strategy would be to buy M&M shares on Friday, July 6 (ahead of the inclusion) and sell on Friday, July 13. You could even go further and do a paired trade: buy M&M and short Hero Honda.
Of course, as with any trading strategy based on historical data and statistical analysis, you would have to take every position (i.e. buy each stock as it is included in the index) to realize the expected return over time. A single trade can neither confirm nor invalidate the strategy.
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