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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
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    References listed on IDEAS

    as
    1. Mark Britten‐Jones & Anthony Neuberger, 2000. "Option Prices, Implied Price Processes, and Stochastic Volatility," Journal of Finance, American Finance Association, vol. 55(2), pages 839-866, April.
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    3. Detlefsen, Kai & Härdle, Wolfgang Karl, 2006. "Forecasting the term structure of variance swaps," SFB 649 Discussion Papers 2006-052, Humboldt University Berlin, Collaborative Research Center 649: Economic Risk.
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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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