regarding markets that de-correlate

Discussion in 'Strategy Development' started by andersod2, Jul 23, 2007.

  1. If two markets are correlated and begin to decorrelate, what is a strategy that takes advantage of this?

    thanks in advance
     
  2. ?..............pairs trade?...........spread trade?..........ratio trade?
     
  3. Two markets that are highly correlated, are the US Dollar Index futures (traded at FINEX) and the EURIBOR futures (traded at LIFFE). Their correlation coefficient, from the Correlations page of www.csidata.com, is -0.977.

    If they began to "de-correlate", that would mean they stopped moving oppositely and started moving together. Both would rise or both would fall.

    Then a trader could form a market opinion about the future, and bet accordingly. A trader could decide to bet that
    1. The de-correlation would continue into the future
    2. The de-correlation would cease, and the two markets would resume their normal correlation
    Clearly, these two opinions require different trading strategies.

    [​IMG]
     
  4. One imagines Mr Anders meant "de-correlate" in the sense of "their correlation declined in absolute value", ie toward zero.
     
  5. Yes, that was what I meant, I think. I don't know much about arbitrage, or currencies. I trade index futures which have low correlation compared to currencies (I take it), but sometimes can be very correlated for a short period of time. Other times they can be roughly correlated if you don't look to close at the screen. They de-correlate when one index reacts to a move more extremely than another, then this continues to happen in one direction or another. It also happens when there's a lot of volume. That's why I'm trying to get a feel for what kinds of things people do (regardless of which two markets you're talking about), when this de-correlation starts. (Sorry if I have the words correlation and de-correlation mixed up).