This chapter discusses trading strategies for indexes, which are diversified portfolios of assets combined with some weights. The chapter discusses trading strategies, including detailed mathematical descriptions, such as cash-and-carry arbitrage also known as index arbitrage, whereby the basis between the current price of an index futures and its theoretical fair value is arbitraged by buying/selling the index basket also known as “cash” and selling/buying the futures, dispersion trading in equity indexes, which amounts to taking long positions on volatilities of the index constituents and a short position on index volatility, dispersion trading using a subset of the index portfolio by utilizing statistical risk models to determine the subset, intraday arbitrage between index EFTs, and index volatility targeting using a risk-free asset for maintaining a constant volatility level by rebalancing between the index and the risk-free asset.
KeywordsCash-and-carry arbitrage Index arbitrage Basis Fair value Cash Futures Dispersion trading Index constituents Index volatility Subset portfolio Intraday arbitrage Volatility targeting Risk-free asset S&P 500 Dow Jones Industrial Average (DJIA) Russell 3000 Market capitalization Spot Correlation trading Index level Sample correlation matrix Principal component analysis (PCA) Statistical risk model Time series Shares outstanding
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