Changes In Implied Correlation Through Time : Exchange Traded Funds and Their Underlying Assets
- Sottile, Thomas
- [University Park, Pennsylvania] : Pennsylvania State University, 2021.
- Physical Description:
- 1 electronic document
- Additional Creators:
- Haushalter, David and Schreyer Honors College
- Restrictions on Access:
- Open Access.
- This paper examines how the implied correlation between an ETF and its underlying assets changes through time and how an investor may take advantage of these changes. The goal of this research is to show that due to times of increased or decreased volatility or other market factors, the co-movement between an ETF and its underlying assets is not always perfectly correlated. This leads to an investment opportunity where, depending on the changes, the correlation between an ETF and its underlying assets is higher or lower compared to its historical average implied correlation. An ETF was selected which had twenty-four underlying assets and both the ETF and its assets have listed options. The implied volatility of the selected ETF and the implied volatilities of its underlying assets were utilized to calculate the implied correlation over a period of thirty-six months between 2017-2019. The results of this study show how implied correlation changed through time. The point where the selected ETF was most correlated with its underlying assets occurred on February 2, 2018 and the implied correlation was 91.12%. In addition, the point where the ETF was least correlated with its underlying assets occurred on September 1, 2017 and the implied correlation was 31.11%. Through this time period, the average implied correlation between the ETF and its underlying assets was 59.70%. Using this data, a correlation trading strategy was tested during a period of high implied correlation between the ETF and its underlying assets. On December 14, 2018, the implied correlation was 88.49% and the results found that an investor using this strategy could profit by $0.5002 per share. The remainder of this paper is organized into an analysis of the topics and related literature, followed by an analysis of the data and methodology, and finally the presentation of the results and summary.
- Dissertation Note:
- B.S. Pennsylvania State University 2021.
- Technical Details:
- The full text of the dissertation is available as an Adobe Acrobat .pdf file ; Adobe Acrobat Reader required to view the file.
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