Index arbitrage strategies pdf

A futures contract is a contract to buy and sell a specified asset at a fixed price in a future time period. Our statistical arbitrage strategy with sector etfs utilizes the. Arbitrageurs love an asset like an index that has lots of different securities based on its value because it creates lots of. A calculator facilitates program trading whatif analyses. Like all arbitrage opportunities, index arbitrage opportunities disappear rapidly once the opportunity becomes wellknown and many investors act on it. Discussing volatility arbitrage strategies, long and short volatility positions.

Consider the funds investment objectives, risks, charges and expenses carefully before investing. When successful, it can make a profit by exploiting market inefficiencies, which occur when the current price doesnt reflect the most recent information about the stock. Index arbitrage financial definition of index arbitrage. Fair value, buysell index arbitrage program trading values, and program trading probability and decaytoexpiration graphs are updated daily. We can manage the risk by hedging the total risk exposure when the broad index turns down. Fundamental risks refer to the risk that new bad information may arrive to the market after you have purchased the security. Application of cointegration to index tracking, index. Index arbitrage and the pricing relationship between. Arbitrage is the simultaneous purchase and sale of securities, commodities or assets in order to profit from price discrepancies, with as little risk as possible. Hedge fund strategies 3 overview hedge funds offer investors a breadth of investment options. An exante arbitrage strategy based on arbitrage signals is analyzed. This can be done in any number of ways depending on where the price discrepancy originates.

Both strategies require the same initial investment, have the same risk and should provide the same. My question is, can this arbitrage strategy still be performed when not all the underlyings have listed options contracts like on the ftse100. Program trading is defined as a wide range of portfolio trading strategies involving the purchase or sale of 15 or more stocks. The conventional dynamic hedging strategy of index futures may not be riskfree. Pdf statistical arbitrage with sector etfs and index. Rebalancing costs and other frictions can limit arbitrage in bond markets du e, 1996. However, we still need to have the appropriate risk management mechanisms in place, as with any other form of trading, he said. The data set contains intraday bid and ask futures quotes and index values on a minute by. Key characteristics distinguishing hedge funds and their strategies from traditional investments include the following. Arbitrage of stock index futures article pdf available in the journal of business 631. In this article, we will attempt to build a trading system based on the third type of risk premium. The main impact is on liquidity, and the liquidity of some strategies depends on how liquid the underlying assets are, and how well calibrated their strategies. Index arbitrage gaining momentum in asia the trade.

This is an event specific strategy wherein the arbitrageur would go long on the target shares and simultaneous short the acquiring company shares. The comparison between the two strategies is summarized in table 4. An example is the simultaneous buying selling of stock index futures i. A profit situation arising from pricing inefficiencies between securities. Index arbitrage is an investment strategy designed to profit from the differences between the actual price of a stock and the theoretical futures price of the same stock. The prospectus and the statement of additional information include this and other relevant information about the funds and are available by visiting or calling 888 4747725. Index arbitrage is defined as the purchase or sale of a basket of stocks in conjunction with the sale or purchase of a derivative product, such as. In this study, we examine the optimal arbitrage strategies in stock index futures with position limits and transaction costs. Index arbitrage and the pricing relationship between australian. A statistical arbitrage approach to test the efficiency of options markets has not yet been attempted. Both strategies require the same initial investment have the same risk and should provide the same proceeds. Investors identify the arbitrage situation through mathematical modeling techniques.

Index arbitrage with xle in looking for pairs of financial instruments to pair trade, we do not have to limit ourselves to pairs that occur in nature. Arbitrage opportunities in indian derivatives markets. In our analysis, the index arbitrage basis is assumed to follow the brownian bridge process. We offer indices covering various currency strategies, including hedged indices that are designed to represent a long position in the underlying index and hedge against the fluctuations of the u. A strategy designed to profit from temporary discrepancies between the prices of the stocks comprising an index and the price of a futures contract on that index. Program trading values, fair value, index arbitrage values, and program trading probability graphs are updated daily. Pure arbitrage is a category of strategies with zero.

What remains is a presentation of arbitragebased arguments and strategies that conveys strong economic intuition, which can fuel further explorations of this pervasively important. Again, if s is the spot price of the index, f is the futures prices, y is the annualized dividend yield on the stock and r is the riskless rate, the arbitrage. One arbitrage strategy involves looking at the price of the index futures price compared with the prices of the options contracts for the underlyings. We can often construct our own baskets of stocks to trade against an index or an etf representing this index. Measuring limits of arbitrage in fixedincome markets. Candriam index arbitrage is an ucits fund, its objective is to outperform eonia over the recommended investment period, mainly through the use of arbitrage strategies and employing risk monitoring with a view to limiting the funds volatility. Index arbitrage can be defined as a strategy designed to profit from tem porary discrepancies between the prices of the stocks comprising the index and the. Arbitrage as a day trading strategy day traders work fast, looking to make lots of little profits by trading stocks and other securities during a single day. There are two parties to every futures contract the seller of the contract, who agrees to deliver the asset at the specified time in the future, and the buyer of the contract, who agrees to pay a fixed price and take delivery of the asset. Understanding arbitrage an intuitive approach to financial analysis. In this project, we implement two trading strategies. An investment strategy that attempts to profit from the differences between actual and theoretical futures prices of the same stock index. Quant investing covers a variety of different trading strategies. We focus on two particular credit arbitrage trades.

We also use futures volume data to identify whether sufficient trading exists to execute a strategy at a given arbitrage price to exploit any futures mispricings. While the individual investment decisions made by each fund vary, many hedge fund strategies share several of the same fundamental goals. Pdf in this paper we analyze hedge fundsstrategies and their market. In practice, arbitrage strategies are risky and costly. Exogenous and endogenous price volatility is confirmed to have a positive impact on the mispricing spread. Index arbitrage an investment trading strategy that exploits divergences between actual and theoretical futures prices. Index arbitrage as a day trading strategy if you have decided to add arbitrage to your bag of day trading strategies, consider index arbitrage. Presenting examples of volatility arbitrage using dynamic delta hedging.

Classical statistical arbitrage picks two highly correlated risky assets, such as two stocks in a same sector, and generates trading signals when one of the stocks is mispriced. Relative impliedvolatility arbitrage with index options. Using the url or doi link below will ensure access to this page indefinitely. Managers may employ a variety of quantitative and qualitative. The aim is the development of strategies with low risk and succeeds this general rule. Session iii index arbitrage 11212017 trading triggers index funds tailing triple witching hour. Index or similar arbitrage strategies are certainly positive for the market, and will rise with more electronic trading in asia.

Optimal arbitrage strategies on stock index futures under position limits min dai1 yifei zhong2 yue kuen kwok3 4 assuming the absence of market frictions, deterministic interest rates, and certainty in dividend payouts from the stocks in the index basket, an arbi. Arbitrage only works if investors can use riskfree and self nancing trading strategies to pro t. Index arbitrage is a trading strategy that attempts to profit from the price differences between two or more market indexes. Last wednesday, the sp500 index went down by just 1. Pdf on feb 1, 1990, michael j brennan and others published arbitrage of stock index. Providing support for the model, neal 1996 finds arbitrage trades narrow the deviation from fair value and most trades involve a simultaneous submission of the stock and futures portions of the trade. Index arbitrage and the pricing relationship between australian stock index futures and their underlying shares abstract this paper examines the mispricing of australian stock index futures. Index metrics include stock listings sorted by price change vs. As a measure of the volatility skew, we use the cboe skew index. There are various risks and the costs associated with the arbitrage. Cointegration portfolios of european equities for index tracking and market neutral strategies. Volatility arbitrage, volatility trading strategies, long.

Index arbitrage and the pricing relationship between australian stock index futures and their underlying shares. Application of cointegration to index tracking, index arbitrage, and related marketneutral strategies introduction these are my expository notes on a paper titled cointegration portfolios of european equities for index tracking and market neutral strategies by c. Indexing and statistical arbitrage carol alexander, anca dimitriu the journal of portfolio management jan 2005, 31 2 5063. Program trading, fair value, index arbitrage values. The model formulation of the option value functions leads to a coupled system of variational inequalities. Introduction financial markets are based on the general trading rulebuy with. No two hedge funds are identical, but funds can be categorized broadly by the type of strategies they employ. The most commonly used and simplest case of statistical arbitrage is pairs trading. One is a statistical arbitrage strategy with sector etfs.

A volatility skew based trading strategy relative value. Clusterbased statistical arbitrage strategy abstract in this paper, we study and develop the classical statistical arbitrage strategy developed by avellaneda and lee 1. Five arbitrage techniques every investor needs to know. By buying either the stocks or the futures contract and selling the other, an investor can sometimes exploit market inefficiency for a profit. Statistical arbitrage, mean reverting, pair trading, kalman filter, trading algorithms 1. Hedge funds are an important subset of the alternative investments space. Dexia index arbitrage pdf in september, dexia asset management strengthened its absolute performance products by launching the dexia index arbitrage fund. Indexiq smart solutions for building better portfolios. It may be an arbitrage between the same index traded on two different exchanges. It may not be a coincidence that the authors used a simple heuristics for stock selection. Arbitrageurs love an asset like an index that has lots of different securities based on its value because it creates lots of opportunities for mispricing. Risks involved in executing arbitrage strategies, specifically interest rate volatility and dividend yield uncertainty, are included to resolve which of these risks. Optimal arbitrage strategies on stock index futures under.