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Trading CDS Indices vs. Equity Index Futures – A pairs trade

Alavei, Daniel LU and Olsson, Tobias LU (2015) EXTM10 20151
Department 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:
author
Alavei, Daniel LU and Olsson, Tobias LU
supervisor
organization
course
EXTM10 20151
year
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},
  keyword      = {Cointegration,Equity Index Future,CDS Index,Pairs Trading},
  language     = {eng},
  note         = {Student Paper},
  title        = {Trading CDS Indices vs. Equity Index Futures – A pairs trade},
  year         = {2015},
}