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The effects of volatility and correlation on CTA strategies
KTH, School of Industrial Engineering and Management (ITM), Industrial Economics and Management (Dept.).
2012 (English)Independent thesis Advanced level (degree of Master (One Year)), 20 credits / 30 HE creditsStudent thesis
Abstract [sv]

Detta examensarbete analyserar effekterna av volatilitet och korrelation på trading strategier brukade av Commodity Trading Advisors (CTA´s). Denna studie bygger på en kvantitativ analys av data som insamlats från Barclay Hedge database. Studien har genomförts i samarbete med RPM Risk & Portfoliomanagement i Stockholm, Sverige. Traditionellt sett, när globala marknader visar på högre volatilitet än genomsnittet, har detta identifierats som ett tecken på en björnmarknad med negativ avkastning på aktier. Förhållandet mellan volatilitet och negativ avkastning på aktier var initialt uppmärksammat av Black år 1976. Förhållandet mellan volatilitet och korrelation mellan marknaderna har analyserats i denna uppsats och resultaten tyder på att högre nivåer av volatilitet för även med sig högre nivåer av korrelation. Den uppmäta korrelationen mellan volatilitet och korrelation var så hög som 0,7. CTA´s handlar så kallade Managed Futures, framtida kontrakt på råvaror, där varje kontrakt har en lång och kort position vilket gör det möjligt att nå en positiv avkastning även under hög volatilitet. De tre mest använda strategierna för CTA´s, short term trading (kortsiktig handel), fundamental handel och Trendföljande handel, presenteras i denna studie och deras möjlighet att bära positiv avkastning i en mycket volatil marknad härleds. Resultaten tyder på att en hög volatilitetsregim med hög korrelation gynnar den kortsiktiga handelsstrategin mer än fundamental och trendföljande handel.

Abstract [en]

This master thesis analyses the impacts of volatility and correlation on common strategies for Commodity Trading Advisors (CTAs). It is based on a quantitative analysis of data gathered from the Barclay Hedge database. The study was done in cooperation with RPM Risk and Portfolio Management based in Stockholm, Sweden. Traditionally, when global markets see higher levels of volatility this has been identified as a sign of a bear market with negative returns on equities. The relationship between volatility and negative returns on equities was first acknowledged by Black in 1976. The relationship between volatility and correlation between markets has been analyzed in this thesis and the findings suggest that higher levels of volatility brings with it higher levels of correlation. The correlation between volatility and correlation is as high as 0.7. CTAs trade future contracts where every contract has a long and short position which is making it possible to reach positive returns even under extreme volatility. The three most popular strategies for CTAs, Short Term trading, Fundamental trading and Trend Following, are presented in this study and their possibility to have positive returns in highly volatile environments is derived from the analysis. The findings suggest that in a high volatility regime with high correlation Short Term trading strategy has been the most profitable.

 

Place, publisher, year, edition, pages
2012. , 54 p.
Series
Examensarbete INDEK, 2012:06
Series
30 hp
Keyword [en]
CTAs, Volatility, Correlation, Trend Following, Short Term, Fundamental, Managed Futures
National Category
Engineering and Technology
Identifiers
URN: urn:nbn:se:kth:diva-102593OAI: oai:DiVA.org:kth-102593DiVA: diva2:555539
External cooperation
RPM
Uppsok
Physics, Chemistry, Mathematics
Supervisors
Examiners
Available from: 2012-09-21 Created: 2012-09-20 Last updated: 2012-09-21Bibliographically approved

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Examensarbete(1906 kB)751 downloads
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