Studying the Properties of the Correlation Trades

Cayetano, Gea (2007): Studying the Properties of the Correlation Trades.

Abstract

This thesis tries to explore the profitability of the dispersion trading strategies. We begin examining the different methods proposed to price variance swaps. We have developed a model that explains why the dispersion trading arises and what the main drivers are. After a description of our model, we implement a dispersion trading in the EuroStoxx 50. We analyze the profile of a systematic short strategy of a variance swap on this index while being long the constituents. We show that there is sense in selling correlation on short-term. We also discuss the timing of the strategy and future developments and improvements.

• Item Type: MPRA Paper
• Language: English
• Keywords: dispersion trading, correlation trading, variance swaps, correlation swaps, p&l, pricing, strategies, equity derivatives
• Subjects: G - Financial Economics > G2 - Financial Institutions and Services; C - Mathematical and Quantitative Methods > C6 - Mathematical Methods ; Programming Models ; Mathematical and Simulation Modeling > C60 - General

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