Correlation Between ISEQ 20 and OMX Stockholm

Can any of the company-specific risk be diversified away by investing in both ISEQ 20 and OMX Stockholm 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 ISEQ 20 and OMX Stockholm into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between ISEQ 20 Price and OMX Stockholm Mid, you can compare the effects of market volatilities on ISEQ 20 and OMX Stockholm 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 ISEQ 20 with a short position of OMX Stockholm. Check out your portfolio center. Please also check ongoing floating volatility patterns of ISEQ 20 and OMX Stockholm.

Diversification Opportunities for ISEQ 20 and OMX Stockholm

0.62

Correlation Coefficient

ISEQ 20  OMX Stockholm

Poor diversification

The 3 months correlation between ISEQ and OMX is 0.62. Overlapping area represents the amount of risk that can be diversified away by holding ISEQ 20 Price and OMX Stockholm Mid in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on OMX Stockholm Mid and ISEQ 20 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 ISEQ 20 Price are associated (or correlated) with OMX Stockholm. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of OMX Stockholm Mid has no effect on the direction of ISEQ 20 i.e., ISEQ 20 and OMX Stockholm go up and down completely randomly.

Pair Corralation between ISEQ 20 and OMX Stockholm

Assuming the 90 days trading horizon ISEQ 20 Price is expected to generate 1.3 times more return on investment than OMX Stockholm. However, ISEQ 20 is 1.3 times more volatile than OMX Stockholm Mid. It trades about -0.04 of its potential returns per unit of risk. OMX Stockholm Mid is currently generating about -0.06 per unit of risk. If you would invest  165,605  in ISEQ 20 Price on September 1, 2024 and sell it today you would lose (4,536) from holding ISEQ 20 Price or give up 2.74% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Significant
Accuracy	98.48%
Values	Daily Returns

ISEQ 20 Price  vs.  OMX Stockholm Mid

Pair Trading with ISEQ 20 and OMX Stockholm

The main advantage of trading using opposite ISEQ 20 and OMX Stockholm positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if ISEQ 20 position performs unexpectedly, OMX Stockholm 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 OMX Stockholm will offset losses from the drop in OMX Stockholm's long position.

The idea behind ISEQ 20 Price and OMX Stockholm Mid 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 Risk-Return Analysis module to view associations between returns expected from investment and the risk you assume.