The dispersion trading strategy exploits periods when an equity index and its constituents diverge. When the average pairwise correlation between index members drops below a threshold, the strategy buys the individual stocks and shorts the index, betting that correlations will mean‑revert.
Daily candles feed a rolling correlation window. If correlations recover above the threshold, all positions are closed. A minimum trade value is enforced to avoid tiny orders.
- Universe: One index security plus its constituent stocks.
- Signal: Open a dispersion trade when the average correlation of constituents is below CorrThreshold.
- Rebalance: Correlation checked every day.
- Positioning: Long constituents and short the index while the signal is active.
- Parameters:
- Constituents – list of component securities.
- LookbackDays – window size for correlation calculation.
- CorrThreshold – correlation level that triggers trades.
- MinTradeUsd – minimum order value in USD.
- CandleType – timeframe for candles (default: 1 day).
- Note: The example omits transaction costs and assumes equal weighting.