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Studying the Properties of the Correlation Trades

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  • Cayetano, Gea

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.

Suggested Citation

  • Cayetano, Gea, 2007. "Studying the Properties of the Correlation Trades," MPRA Paper 22318, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:22318
    as

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    File URL: https://mpra.ub.uni-muenchen.de/22318/1/MPRA_paper_22318.pdf
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    References listed on IDEAS

    as
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    3. Kai Detlefsen & Wolfgang Härdle, 2006. "Forecasting the Term Structure of Variance Swaps," SFB 649 Discussion Papers SFB649DP2006-052, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
    4. Peter P. Carr & Robert A. Jarrow, 2008. "The Stop-Loss Start-Gain Paradox and Option Valuation: A new Decomposition into Intrinsic and Time Value," World Scientific Book Chapters, in: Financial Derivatives Pricing Selected Works of Robert Jarrow, chapter 4, pages 61-84, World Scientific Publishing Co. Pte. Ltd..
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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    dispersion trading; correlation trading; variance swaps; correlation swaps; p&l; pricing; strategies; equity derivatives;
    All these keywords.

    JEL classification:

    • G2 - Financial Economics - - Financial Institutions and Services
    • C60 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - General

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