Dispersion Trading in South Africa: An Analysis of Profitability and a Strategy Comparison

37 Pages Posted: 19 Apr 2014

See all articles by Sheldon Maze

Sheldon Maze

University of Cape Town (UCT) - Department of Actuarial Science

Date Written: September 30, 2012

Abstract

A dispersion trade is entered into when a trader believes that the constituents of an index will be more volatile than the index itself. The South African derivatives market is fairly advanced, however it still experiences inefficiencies and dispersion trades have been known to perform well in inefficient markets. This paper tests the South African market for dispersion opportunities and explores various methods of executing these trades. The South African market shows positive results for dispersion trading; namely short-term reverse dispersion trading. Call options and Cross-Sectional Volatility (CSV) swaps are also tested. CSV swaps performed poorly whereas call options experienced annual returns well above the market.

Keywords: dispersion trading, volatility arbitrage, cross-sectional volatility, reverse dispersion trade

JEL Classification: G11

Suggested Citation

Maze, Sheldon, Dispersion Trading in South Africa: An Analysis of Profitability and a Strategy Comparison (September 30, 2012). Available at SSRN: https://ssrn.com/abstract=2398223 or http://dx.doi.org/10.2139/ssrn.2398223

Sheldon Maze (Contact Author)

University of Cape Town (UCT) - Department of Actuarial Science ( email )

South Africa

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