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

På svenska

Author

  • Daniel Alavei
  • Tobias Olsson

Summary, in English

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.

Publishing year

2015

Language

English

Document type

Student publication for Master's degree (two years)

Topic

  • Business and Economics

Keywords

  • Cointegration
  • Equity Index Future
  • CDS Index
  • Pairs Trading

Supervisor

  • Rikard Green