Correlation Between ICICI Bank and HDFC Bank

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

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

Diversification Opportunities for ICICI Bank and HDFC Bank

0.87

Correlation Coefficient

ICICI Bank  HDFC Bank

Very poor diversification

The 3 months correlation between ICICI and HDFC is 0.87. Overlapping area represents the amount of risk that can be diversified away by holding ICICI Bank Limited and HDFC Bank Limited in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on HDFC Bank Limited and ICICI Bank 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 ICICI Bank Limited are associated (or correlated) with HDFC Bank. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of HDFC Bank Limited has no effect on the direction of ICICI Bank i.e., ICICI Bank and HDFC Bank go up and down completely randomly.

Pair Corralation between ICICI Bank and HDFC Bank

Assuming the 90 days trading horizon ICICI Bank Limited is expected to generate 1.23 times more return on investment than HDFC Bank. However, ICICI Bank is 1.23 times more volatile than HDFC Bank Limited. It trades about -0.08 of its potential returns per unit of risk. HDFC Bank Limited is currently generating about -0.11 per unit of risk. If you would invest  18,962  in ICICI Bank Limited on December 24, 2024 and sell it today you would lose (1,514) from holding ICICI Bank Limited or give up 7.98% of portfolio value over 90 days.

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

ICICI Bank Limited  vs.  HDFC Bank Limited

ICICI Bank Limited

Risk-Adjusted Performance

Very Weak

Over the last 90 days ICICI Bank Limited has generated negative risk-adjusted returns adding no value to investors with long positions. Despite latest uncertain performance, the Stock's fundamental drivers remain strong and the current disturbance on Wall Street may also be a sign of long term gains for the company investors.

HDFC Bank Limited

Risk-Adjusted Performance

Very Weak

Over the last 90 days HDFC Bank Limited has generated negative risk-adjusted returns adding no value to investors with long positions. Despite latest weak performance, the Stock's fundamental indicators remain strong and the current disturbance on Wall Street may also be a sign of long term gains for the company investors.

Pair Trading with ICICI Bank and HDFC Bank

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

The idea behind ICICI Bank Limited and HDFC Bank Limited 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 AI Portfolio Architect module to use AI to generate optimal portfolios and find profitable investment opportunities.