Correlation Between ICEX Main and BIST Electricity

Can any of the company-specific risk be diversified away by investing in both ICEX Main and BIST Electricity at the same time? Although using a correlation coefficient on its own may not help to predict future stock returns, this module helps to understand the diversifiable risk of combining ICEX Main and BIST Electricity into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between ICEX Main and BIST Electricity, you can compare the effects of market volatilities on ICEX Main and BIST Electricity and check how they will diversify away market risk if combined in the same portfolio for a given time horizon. You can also utilize pair trading strategies of matching a long position in ICEX Main with a short position of BIST Electricity. Check out your portfolio center. Please also check ongoing floating volatility patterns of ICEX Main and BIST Electricity.

Diversification Opportunities for ICEX Main and BIST Electricity

0.08

Correlation Coefficient

ICEX Main  BIST Electricity

Significant diversification

The 3 months correlation between ICEX and BIST is 0.08. Overlapping area represents the amount of risk that can be diversified away by holding ICEX Main and BIST Electricity in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on BIST Electricity and ICEX Main is a relative statistical measure of the degree to which these equity instruments tend to move together. The correlation coefficient measures the extent to which returns on ICEX Main are associated (or correlated) with BIST Electricity. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of BIST Electricity has no effect on the direction of ICEX Main i.e., ICEX Main and BIST Electricity go up and down completely randomly.

Pair Corralation between ICEX Main and BIST Electricity

Assuming the 90 days trading horizon ICEX Main is expected to generate 2.05 times less return on investment than BIST Electricity. But when comparing it to its historical volatility, ICEX Main is 2.65 times less risky than BIST Electricity. It trades about 0.39 of its potential returns per unit of risk. BIST Electricity is currently generating about 0.3 of returns per unit of risk over similar time horizon. If you would invest  54,088  in BIST Electricity on February 2, 2024 and sell it today you would earn a total of  5,261  from holding BIST Electricity or generate 9.73% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Insignificant
Accuracy	85.71%
Values	Daily Returns

ICEX Main  vs.  BIST Electricity

Pair Trading with ICEX Main and BIST Electricity

The main advantage of trading using opposite ICEX Main and BIST Electricity positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if ICEX Main position performs unexpectedly, BIST Electricity can make up some of the losses. Pair trading also minimizes risk from directional movements in the market. For example, if an entire industry or sector drops because of unexpected headlines, the short position in BIST Electricity will offset losses from the drop in BIST Electricity's long position.

The idea behind ICEX Main and BIST Electricity pairs trading is to make the combined position market-neutral, meaning the overall market's direction will not affect its win or loss (or potential downside or upside). This can be achieved by designing a pairs trade with two highly correlated stocks or equities that operate in a similar space or sector, making it possible to obtain profits through simple and relatively low-risk investment.

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Note that this page's information should be used as a complementary analysis to find the right mix of equity instruments to add to your existing portfolios or create a brand new portfolio. You can also try the Portfolio Optimization module to compute new portfolio that will generate highest expected return given your specified tolerance for risk.