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.