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In finance, correlation trading is a strategy in which the investor gets exposure to the average correlation of an index.. The key to correlation trading is being able to predict when future realized correlation amongst the stocks of a particular index will be greater or less than the "implied" correlation level derived from derivatives on the index and its single stocks.
A pairs trade or pair trading is a market neutral trading strategy enabling traders to profit from virtually any market conditions: uptrend, downtrend, or sideways movement. This strategy is categorized as a statistical arbitrage and convergence trading strategy. [ 1 ]
Mathematically speaking, the strategy is to find a pair of stocks with high correlation, cointegration, or other common factor characteristics. Various statistical tools have been used in the context of pairs trading ranging from simple distance-based approaches to more complex tools such as cointegration and copula concepts. [3]
Trend following is used by commodity trading advisors (CTAs) as the predominant strategy of technical traders. Research done by Galen Burghardt has shown that between 2000-2009 there was a very high correlation (.97) between trend following CTAs and the broader CTA index. [2]
"The chart shows the sharp reversal in correlations between stocks and yields that occurred in December. This was the main reason stocks struggled into year end and for the first week of the year.
Evaluating the Hedge Fund Research index returns for 28 different strategies from January 2005 to April 2009 showed that equity-market-neutral strategy had the second-lowest correlation with any of the other strategies, [citation needed] behind only short-bias funds that typically have a negative correlation with all other funds. This result is ...
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