Dispersion Trading in South Africa: An Analysis of Profitability and a Strategy Comparison
37 Pages Posted: 19 Apr 2014
Date Written: September 30, 2012
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: Suggested Citation