Correlation Between Texas Capital and First Financial

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

By analyzing existing cross correlation between Texas Capital Bancshares and First Financial Bankshares, you can compare the effects of market volatilities on Texas Capital and First Financial 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 Texas Capital with a short position of First Financial. Check out your portfolio center. Please also check ongoing floating volatility patterns of Texas Capital and First Financial.

Diversification Opportunities for Texas Capital and First Financial

0.8

Correlation Coefficient

Texas Capital  First Financial

Very poor diversification

The 3 months correlation between Texas and First is 0.8. Overlapping area represents the amount of risk that can be diversified away by holding Texas Capital Bancshares and First Financial Bankshares in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on First Financial Bank and Texas Capital 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 Texas Capital Bancshares are associated (or correlated) with First Financial. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of First Financial Bank has no effect on the direction of Texas Capital i.e., Texas Capital and First Financial go up and down completely randomly.

Pair Corralation between Texas Capital and First Financial

Given the investment horizon of 90 days Texas Capital Bancshares is expected to under-perform the First Financial. In addition to that, Texas Capital is 1.26 times more volatile than First Financial Bankshares. It trades about -0.02 of its total potential returns per unit of risk. First Financial Bankshares is currently generating about 0.01 per unit of volatility. If you would invest  3,620  in First Financial Bankshares on December 28, 2024 and sell it today you would earn a total of  9.00  from holding First Financial Bankshares or generate 0.25% return on investment over 90 days.

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

Texas Capital Bancshares  vs.  First Financial Bankshares

Texas Capital Bancshares

Risk-Adjusted Performance

Very Weak

Over the last 90 days Texas Capital Bancshares has generated negative risk-adjusted returns adding no value to investors with long positions. Despite fairly strong fundamental drivers, Texas Capital is not utilizing all of its potentials. The current stock price confusion, may contribute to short-horizon losses for the traders.

First Financial Bank

Risk-Adjusted Performance

Very Weak

Over the last 90 days First Financial Bankshares has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of very healthy forward indicators, First Financial is not utilizing all of its potentials. The current stock price disarray, may contribute to short-term losses for the investors.

Pair Trading with Texas Capital and First Financial

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

The idea behind Texas Capital Bancshares and First Financial Bankshares 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 Theme Ratings module to determine theme ratings based on digital equity recommendations. Macroaxis theme ratings are based on combination of fundamental analysis and risk-adjusted market performance.