Correlation Between American Airlines and Southwest Airlines

Can any of the company-specific risk be diversified away by investing in both American Airlines and Southwest Airlines 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 American Airlines and Southwest Airlines into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between American Airlines Group and Southwest Airlines, you can compare the effects of market volatilities on American Airlines and Southwest Airlines 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 American Airlines with a short position of Southwest Airlines. Check out your portfolio center. Please also check ongoing floating volatility patterns of American Airlines and Southwest Airlines.

Diversification Opportunities for American Airlines and Southwest Airlines

0.35

Correlation Coefficient

American Airlines  Southwest Airlines

Weak diversification

The 3 months correlation between American and Southwest is 0.35. Overlapping area represents the amount of risk that can be diversified away by holding American Airlines Group and Southwest Airlines in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Southwest Airlines and American Airlines 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 American Airlines Group are associated (or correlated) with Southwest Airlines. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Southwest Airlines has no effect on the direction of American Airlines i.e., American Airlines and Southwest Airlines go up and down completely randomly.

Pair Corralation between American Airlines and Southwest Airlines

Considering the 90-day investment horizon American Airlines Group is expected to under-perform the Southwest Airlines. In addition to that, American Airlines is 1.16 times more volatile than Southwest Airlines. It trades about -0.37 of its total potential returns per unit of risk. Southwest Airlines is currently generating about -0.2 per unit of volatility. If you would invest  3,258  in Southwest Airlines on November 28, 2024 and sell it today you would lose (189.00) from holding Southwest Airlines or give up 5.8% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Very Weak
Accuracy	100.0%
Values	Daily Returns

American Airlines Group  vs.  Southwest Airlines

American Airlines

Risk-Adjusted Performance

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in American Airlines Group are ranked lower than 3 (%) of all global equities and portfolios over the last 90 days. Despite quite abnormal basic indicators, American Airlines may actually be approaching a critical reversion point that can send shares even higher in March 2025.

Southwest Airlines

Risk-Adjusted Performance

Very Weak

Over the last 90 days Southwest Airlines has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of fairly stable basic indicators, Southwest Airlines is not utilizing all of its potentials. The latest stock price fuss, may contribute to near-short-term losses for the sophisticated investors.

Pair Trading with American Airlines and Southwest Airlines

The main advantage of trading using opposite American Airlines and Southwest Airlines positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if American Airlines position performs unexpectedly, Southwest Airlines 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 Southwest Airlines will offset losses from the drop in Southwest Airlines' long position.

The idea behind American Airlines Group and Southwest Airlines 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 Manager module to state of the art Portfolio Manager to monitor and improve performance of your invested capital.