Trading CDS Indices vs. Equity Index Futures – A pairs trade
(2015) EXTM10 20151Department of Economics
- Abstract
- In this thesis we use a unique data set to show that there is a cointegrating relationship
between the EURO STOXX 50 index and the Markit iTraxx Europe index that can be
exploited through trading. As far as we know, we are the first ones to write about trading
this pair in an academic paper. On our way we deal with various peculiarities in the data
set before we manage to find cointegration. The cointegration is evident enough to be
utilized when trading the pair. We deal with many practical issues when simulating the
trading environment, like marking-to-market of CDS index positions. We successively add
more layers of reality to the trading simulation, such as bid-offer-spreads and even in the
last step our strategies are highly... (More) - In this thesis we use a unique data set to show that there is a cointegrating relationship
between the EURO STOXX 50 index and the Markit iTraxx Europe index that can be
exploited through trading. As far as we know, we are the first ones to write about trading
this pair in an academic paper. On our way we deal with various peculiarities in the data
set before we manage to find cointegration. The cointegration is evident enough to be
utilized when trading the pair. We deal with many practical issues when simulating the
trading environment, like marking-to-market of CDS index positions. We successively add
more layers of reality to the trading simulation, such as bid-offer-spreads and even in the
last step our strategies are highly profitable. Finally, we benchmark our strategies against
indices and show that they have low market correlation. This is achieved by introducing an
alternative beta measure, customized for the involved assets. (Less)
Please use this url to cite or link to this publication:
http://lup.lub.lu.se/student-papers/record/7861806
- author
- Alavei, Daniel LU and Olsson, Tobias LU
- supervisor
-
- Rikard Green LU
- organization
- course
- EXTM10 20151
- year
- 2015
- type
- H2 - Master's Degree (Two Years)
- subject
- keywords
- Cointegration, Equity Index Future, CDS Index, Pairs Trading
- language
- English
- id
- 7861806
- date added to LUP
- 2015-09-09 13:26:01
- date last changed
- 2015-09-22 11:06:25
@misc{7861806, abstract = {{In this thesis we use a unique data set to show that there is a cointegrating relationship between the EURO STOXX 50 index and the Markit iTraxx Europe index that can be exploited through trading. As far as we know, we are the first ones to write about trading this pair in an academic paper. On our way we deal with various peculiarities in the data set before we manage to find cointegration. The cointegration is evident enough to be utilized when trading the pair. We deal with many practical issues when simulating the trading environment, like marking-to-market of CDS index positions. We successively add more layers of reality to the trading simulation, such as bid-offer-spreads and even in the last step our strategies are highly profitable. Finally, we benchmark our strategies against indices and show that they have low market correlation. This is achieved by introducing an alternative beta measure, customized for the involved assets.}}, author = {{Alavei, Daniel and Olsson, Tobias}}, language = {{eng}}, note = {{Student Paper}}, title = {{Trading CDS Indices vs. Equity Index Futures – A pairs trade}}, year = {{2015}}, }