Dispersion Trading

5 Pages Posted: 20 Jul 2011

See all articles by Volker Vonhoff

Volker Vonhoff

University of Mannheim - Department of Business Administration and Finance

Date Written: July 14, 2006

Abstract

The main goal of this thesis is to rationalize why dispersion trading is a worth-while strategy. Therefore, definitions of volatility and correlation are presented and their modeling and predictability are discussed extensively. In particular, we rigorously investigate different measures of average correlation of an index. Thereby, we set the foundations for academically discussing dispersion trading. Using the concept of average correlation we rationalize that the potential profit obtained in a dispersion trade can be attributed to particular properties of the index volatility skew and to a negative premium for correlation risk. We confirm these results and recent empirical findings by examining the average correlation of the Dow Jones Euro Stoxx 50.

Keywords: Volatility Trading, Dispersion Trading, Correlation Trading

JEL Classification: G10, G13

Suggested Citation

Vonhoff, Volker, Dispersion Trading (July 14, 2006). Available at SSRN: https://ssrn.com/abstract=1889147 or http://dx.doi.org/10.2139/ssrn.1889147

Volker Vonhoff (Contact Author)

University of Mannheim - Department of Business Administration and Finance ( email )

Mannheim, 68131
Germany
+49 621 181-1518 (Phone)
+49 621 181-1519 (Fax)

HOME PAGE: http://finanzierung.bwl.uni-mannheim.de/de/faculty/alumni/vonhoff/

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
1,122
Abstract Views
3,451
rank
27,673
PlumX Metrics