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Dispersion trading: many applications. Julien Messias (julien.messias@uncia-am.

com),
Uncia Asset Management & Michel-Hugo Battistini, Thomson Reuters
(MichelHugo.Battistini@thomsonreuters.com),

http://eqderivatives.com/

Dispersion / Correlation trading may be set up in different ways. From the theoretical products
– but illiquid – such as Conditional Variance Swaps, or Variance Swaps, to vanilla options, we
focus on the different weighting schemes. We further investigate the impact of non-constant
weights and the application to Sector Indices.

Correlation smile, does it exist?

According to Avallaneda [2009], independently of the absolute correlation level, it seems that correlation
skew is overwhelmingly overpriced by implied parameters compared to the realized skew – especially on
longer maturities. Correlation smile have been computed through index and single stocks realized
volatility skews.

Computing realized volatility skew:

Using Conditional Variance Swaps

The purest way to trade correlation skew should be done using conditional Variance Swaps, through the
following trade – in a correlation skew seller way:
- Sell an Index downside conditional variance swap – conditional strike: 80%

- Buy an Index ATM conditional variance swap – conditional strike: 100%

- Buy on each single stock a downside conditional variance swap – conditional strike: 80%

- Sell on each single stock an ATM conditional variance swap – conditional strike: 100%

A conditional Variance Swap can be seen as a Variance Swap which is live only when the underlying price
is in the observation range. Pay-off of a long position is the following:

𝑉𝑒𝑔𝑎𝑁𝑜𝑡𝑖𝑜𝑛𝑎𝑙 2 2
𝐶𝑜𝑛𝑑𝑉𝑆 = . 𝑉𝑎𝑟𝑖𝑎𝑛𝑐𝑒𝐴𝑑𝑗𝑢𝑠𝑡𝑚𝑒𝑛𝑡. (𝜎𝑅𝑒𝑎𝑙𝑖𝑧𝑒𝑑 − 𝜎𝑆𝑡𝑟𝑖𝑘𝑒 )
2. 𝜎𝑆𝑡𝑟𝑖𝑘𝑒

𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑑𝑎𝑦𝑠 𝑖𝑛 𝑡ℎ𝑒 𝑟𝑎𝑛𝑔𝑒


𝑉𝑎𝑟𝑖𝑎𝑛𝑐𝑒𝐴𝑑𝑗𝑢𝑠𝑡𝑚𝑒𝑛𝑡 =
𝑇𝑜𝑡𝑎𝑙 𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑑𝑎𝑦𝑠

It differs from a standard Variance Swap because of the Variance Adjustment term, and because of a
different strike. For example, in the short position on the Index downside conditional variance swap, the
realized variance would be accrued if and only if the closing price of day t or t-1 is (equal or) lower than
80% of the level of the Index at inception.

This instrument allows the investor to trade only the correlation skew part he is interested in. But they
are too illiquid and might be interesting only through a theoretical viewpoint. Therefore, let’s focus on
tradable instruments and translate this position into vanilla Variance Swaps.

Using Variance Swaps

Variance Swaps only allow to trade the whole correlation smile, whereas it does not enable to trade a
correlation moneyness versus another as Conditional Variance Swaps would.

The well-known payoff is:

𝑉𝑒𝑔𝑎𝑁𝑜𝑡𝑖𝑜𝑛𝑎𝑙 2 2
𝑃𝑁𝐿𝑉𝑆 = . (𝜎𝑅𝑒𝑎𝑙𝑖𝑧𝑒𝑑 − 𝜎𝑆𝑡𝑟𝑖𝑘𝑒 )
2. 𝜎𝑆𝑡𝑟𝑖𝑘𝑒

With

𝑇
2
252 𝑆𝑡 + 1𝐷𝑖𝑣𝑡 . 𝐷𝑖𝑣𝑡
𝜎𝑅𝑒𝑎𝑙𝑖𝑧𝑒𝑑 = . ∑ 𝑙𝑛²( ) 𝑇: 𝑡𝑜𝑡𝑎𝑙 𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑑𝑎𝑦𝑠
𝑇 𝑆𝑡−1
𝑡=1

One know, according to Bossu [2005], that many risk parameters of a Variance Swap position remain
constants, issued directly from the synthetic replication theory:

- with respect to spot price (caeteris paribus):

𝑑𝑣𝑒𝑔𝑎 𝑑 2 𝑜𝑝𝑡𝑖𝑜𝑛
* Vega position = = 0  vanna null
𝑑𝑠𝑝𝑜𝑡 𝑑𝑣𝑜𝑙𝑑𝑠𝑝𝑜𝑡
𝑑2 𝑜𝑝𝑡𝑖𝑜𝑛
𝑑𝛾𝑐𝑎𝑠ℎ .𝑠𝑝𝑜𝑡²
* Cash Gamma position
𝑑𝑠𝑝𝑜𝑡²
= =0
𝑑𝑠𝑝𝑜𝑡 𝑑𝑠𝑝𝑜𝑡

- with respect to the time (caeteris paribus):

𝑑2 𝑜𝑝𝑡𝑖𝑜𝑛
𝑑𝛾𝑐𝑎𝑠ℎ .𝑠𝑝𝑜𝑡²
* Cash Gamma position
𝑑𝑠𝑝𝑜𝑡²
= =0
𝑑𝑡𝑖𝑚𝑒 𝑑𝑡𝑖𝑚𝑒

Moreover, Derman [1999] and Bossu [2005] proved thanks to the replication method that Variance Swaps
are a positive function with respect to the asset skew magnitude: the steeper the skew, the more expensive
the Variance Swap.

Using a Black – Scholes calculation framework allows variance swap pricing through replication method

𝟐 𝑭 𝑷𝒖𝒕𝑲 +∞ 𝑷𝒖𝒕𝑲
– for maturity T: 𝑽𝑺𝑺𝒕𝒓𝒊𝒌𝒆 = √[ . (∫𝟎 𝒅𝑲 + ∫𝑭 𝒅𝑲]
𝑻 𝑲² 𝑲²

Different schemes of dispersion trades:

The first issue is about the kind of dispersion to setup. Many different schemes to choose among:

- Vega weighted flat dispersion trade, for which Vega sizes might be rounded as following: let’s use
𝜎
the following weight for each i belonging to the Index: 𝑤𝑖 . 𝐼𝑛𝑑𝑒𝑥 usually lower than 𝑤𝑖 due to
𝜎𝑖
correlation effect.

Then, the following weighted scheme becomes:

𝑛 𝑛
𝜎𝐼𝑛𝑑𝑒𝑥
∑ 𝑉𝑒𝑔𝑎𝑖 = 𝑉𝑒𝑔𝑎𝐼𝑛𝑑𝑒𝑥 . ∑ 𝑤𝑖 . ≈ 𝑉𝑒𝑔𝑎𝐼𝑛𝑑𝑒𝑥 . √𝜌𝐼𝑚𝑝𝑙𝑖𝑒𝑑
𝜎𝑖
𝑖=1 𝑖=1

Bossu [2005]

𝑛 𝑉𝑒𝑔𝑎 𝐾𝐼𝑛𝑑𝑒𝑥
𝑉𝑒𝑔𝑎𝐼𝑛𝑑𝑒𝑥 𝐼𝑛𝑑𝑒𝑥 . (𝑤𝑖 . 𝐾𝑖
)
𝑃𝑁𝐿𝐷𝑖𝑠𝑝𝑒𝑟𝑠𝑖𝑜𝑛 = 2
. (𝐾𝐼𝑛𝑑𝑒𝑥 2
− 𝜎𝐼𝑛𝑑𝑒𝑥 )+∑ 2
. ( 𝜎𝐼𝑛𝑑𝑒𝑥 − 𝐾𝑖2 )
2. 𝐾𝐼𝑛𝑑𝑒𝑥 2. 𝐾𝑖
𝑖=1

𝑛
2 2
𝑉𝑒𝑔𝑎𝐼𝑛𝑑𝑒𝑥 𝐾𝐼𝑛𝑑𝑒𝑥 𝜎𝐼𝑛𝑑𝑒𝑥 𝑤𝑖
= . [( − 2
) + 𝐾𝐼𝑛𝑑𝑒𝑥 . ∑ 2 . ( 𝜎𝐼𝑛𝑑𝑒𝑥 − 𝐾𝑖2 )]
2 𝐾𝐼𝑛𝑑𝑒𝑥 𝐾𝐼𝑛𝑑𝑒𝑥 𝐾𝑖
𝑖=1

𝑛
2
𝑉𝑒𝑔𝑎𝐼𝑛𝑑𝑒𝑥 𝜎𝐼𝑛𝑑𝑒𝑥 𝑤𝑖
= . [(− 2
) + 𝐾𝐼𝑛𝑑𝑒𝑥 . (1 + ∑ 2 . ( 𝜎𝐼𝑛𝑑𝑒𝑥 − 𝐾𝑖2 ))]
2 𝐾𝐼𝑛𝑑𝑒𝑥 𝐾𝑖
𝑖=1

𝑛 𝑛
𝑉𝑒𝑔𝑎𝐼𝑛𝑑𝑒𝑥 𝜎𝐼𝑛𝑑𝑒𝑥 𝑤𝑖 𝑤𝑖
= . 𝐾𝐼𝑛𝑑𝑒𝑥 . [(− ) ² + (1 + ∑ 2 . 𝜎𝑖2 − ∑ 2 . 𝐾𝑖2 )]
2 𝐾𝐼𝑛𝑑𝑒𝑥 𝐾𝑖 𝐾𝑖
𝑖=1 𝑖=1

𝑛
𝑉𝑒𝑔𝑎𝐼𝑛𝑑𝑒𝑥 𝜎𝐼𝑛𝑑𝑒𝑥 𝑤𝑖
= . 𝐾𝐼𝑛𝑑𝑒𝑥 . [(− ) ² + (1 + ∑ 2 . 𝜎𝑖2 − 1)]
2 𝐾𝐼𝑛𝑑𝑒𝑥 𝐾𝑖
𝑖=1

𝑛
𝑉𝑒𝑔𝑎𝐼𝑛𝑑𝑒𝑥 𝜎𝑖 2 𝜎𝐼𝑛𝑑𝑒𝑥 2
= . 𝐾𝐼𝑛𝑑𝑒𝑥 . [∑ 𝑤𝑖 . ( ) − ( ) ]
2 𝐾𝑖 𝐾𝐼𝑛𝑑𝑒𝑥
𝑖=1

This weighting scheme enables to analyze more easily the PNL.

Let’s use the proxy formula by Allen, Einchcomb and Granger:


𝑛
𝑉𝑒𝑔𝑎𝐼𝑛𝑑𝑒𝑥 𝜎𝑖 2 𝜌𝑅𝑒𝑎𝑙𝑖𝑧𝑒𝑑 . (∑𝑛𝑖=1 𝑤𝑖 . 𝜎𝑖 )²
𝑃𝑁𝐿𝐷𝑖𝑠𝑝𝑒𝑟𝑠𝑖𝑜𝑛 ≈ . 𝐾𝐼𝑛𝑑𝑒𝑥 . [∑ 𝑤𝑖 . ( ) − ]
2 𝐾𝑖 𝜌𝐼𝑚𝑝𝑙𝑖𝑒𝑑 . (∑𝑛𝑖=1 𝑤𝑖 . 𝐾𝑖 )²
𝑖=1

The best scenario in this case is a low realized correlation and high stock realized volatilities. This scenario
is quite unlikely as correlation and volatilities are two very correlated assets – except seasonality
phenomena such as results releases by companies.

𝜎𝑖
If it is assumed that each i’s volatility moves by – being what is implied by the vega weighted flat
𝜎𝐼𝑛𝑑𝑒𝑥
scheme, what is the impact on the Index variance:

𝑛 𝑛 𝑛
𝜎𝑖 2 𝜎𝐼𝑛𝑑𝑒𝑥 𝜎𝑗
2
𝜎𝐼𝑛𝑑𝑒𝑥,𝑛𝑒𝑤 = ∑ 𝑤𝑖2 . (𝜎𝑖 + ) + 𝜌. ∑ ∑ 𝑤𝑖 . 𝑤𝑗 . (𝜎𝑖 + ) . ( (𝜎𝑗 + )
𝜎𝐼𝑛𝑑𝑒𝑥 𝜎𝐼𝑛𝑑𝑒𝑥 𝜎𝐼𝑛𝑑𝑒𝑥
𝑖=1 𝑖=1 𝑗=1 𝑗≠𝑖

𝑛 𝑛 𝑛 𝑛 𝑛 𝑛 𝑛
2 1 2𝜌
2
𝜎𝐼𝑛𝑑𝑒𝑥,𝑛𝑒𝑤 = ∑ 𝑤𝑖2 . 𝜎𝑖2 + . ∑ 𝑤𝑖2 . 𝜎𝑖2 + 2 . ∑ 𝑤𝑖2 . 𝜎𝑖2 + 𝜌. ∑ ∑ 𝑤𝑖 𝑤𝑗 𝜎𝑖 𝜎𝑗 + . ∑ ∑ 𝑤𝑖 𝑤𝑗 𝜎𝑖 𝜎𝑗
𝜎𝐼𝑛𝑑𝑒𝑥 𝜎𝐼𝑛𝑑𝑒𝑥 𝜎𝐼𝑛𝑑𝑒𝑥
𝑖=1 𝑖=1 𝑖=1 𝑖=1 𝑗=1 𝑗≠𝑖 𝑖=1 𝑗=1 𝑗≠𝑖
𝑛 𝑛
𝜌
+ 2 . ∑ ∑ 𝑤𝑖 𝑤𝑗 𝜎𝑖 𝜎𝑗
𝜎𝐼𝑛𝑑𝑒𝑥
𝑖=1 𝑗=1 𝑗≠𝑖

𝑛 𝑛 𝑛 𝑛 𝑛 𝑛 𝑛
2 1
2
𝜎𝐼𝑛𝑑𝑒𝑥,𝑛𝑒𝑤 = {∑ 𝑤𝑖2 . 𝜎𝑖2 + 𝜌. ∑ ∑ 𝑤𝑖 𝑤𝑗 𝜎𝑖 𝜎𝑗 } + . {∑ 𝑤𝑖2 . 𝜎𝑖2 + 2 . ∑ 𝑤𝑖2 . 𝜎𝑖2 + 𝜌. ∑ ∑ 𝑤𝑖 𝑤𝑗 𝜎𝑖 𝜎𝑗 }
𝜎𝐼𝑛𝑑𝑒𝑥 𝜎𝐼𝑛𝑑𝑒𝑥
𝑖=1 𝑖=1 𝑗=1 𝑗≠𝑖 𝑖=1 𝑖=1 𝑖=1 𝑗=1 𝑗≠𝑖
𝑛 𝑛 𝑛
1
+ 2 . {∑ 𝑤𝑖2 . 𝜎𝑖2 + 𝜌. ∑ ∑ 𝑤𝑖 𝑤𝑗 𝜎𝑖 𝜎𝑗 }
𝜎𝐼𝑛𝑑𝑒𝑥
𝑖=1 𝑖=1 𝑗=1 𝑗≠𝑖

2 2
2 1
𝜎𝐼𝑛𝑑𝑒𝑥,𝑛𝑒𝑤 = 𝜎𝐼𝑛𝑑𝑒𝑥 + . 𝜎2 + 2 2
. 𝜎𝐼𝑛𝑑𝑒𝑥 = (𝜎𝐼𝑛𝑑𝑒𝑥 + 1)²
𝜎𝐼𝑛𝑑𝑒𝑥 𝐼𝑛𝑑𝑒𝑥 𝜎𝐼𝑛𝑑𝑒𝑥

𝜎𝑖
Then, a move of on each stock i volatility entails a 1point move on the Index volatility.
𝜎𝐼𝑛𝑑𝑒𝑥

- vega flat dispersion trade, meaning that at inception, the sum of the single stocks vegas matches
the index vega

It consists in the following weighting scheme: ∑𝑛𝑖=1 𝑉𝑒𝑔𝑎𝑖 = 𝑉𝑒𝑔𝑎𝐼𝑛𝑑𝑒𝑥 . ∑𝑛𝑖=1 𝑤𝑖

Long Variance swaps PNL are the following:

𝑉𝑒𝑔𝑎𝐼𝑛𝑑𝑒𝑥 2 2
𝑃𝑁𝐿𝐼𝑛𝑑𝑒𝑥 = . (𝜎𝐼𝑛𝑑𝑒𝑥 − 𝐾𝐼𝑛𝑑𝑒𝑥 )
2. 𝐾𝐼𝑛𝑑𝑒𝑥

𝑉𝑒𝑔𝑎𝐼𝑛𝑑𝑒𝑥 . 𝑤𝑖
𝑃𝑁𝐿𝑖 = . (𝜎𝑖2 − 𝐾𝑖2 )
2. 𝐾𝑖

Long Dispersion PNL becomes:

𝑉𝑒𝑔𝑎𝐼𝑛𝑑𝑒𝑥 𝑉𝑒𝑔𝑎𝐼𝑛𝑑𝑒𝑥 . 𝑤𝑖
𝑃𝑁𝐿𝐷𝑖𝑠𝑝𝑒𝑟𝑠𝑖𝑜𝑛 = 2
. (𝐾𝐼𝑛𝑑𝑒𝑥 2
− 𝜎𝐼𝑛𝑑𝑒𝑥 )+ . (𝜎𝑖2 − 𝐾𝑖2 )
2. 𝐾𝐼𝑛𝑑𝑒𝑥 2. 𝐾𝑖

Vega flat strategy may be split between a Vega Weighted Flat strategy plus a Long position on the Index
Variance Swap. This bias is implied because correlation effect is not taken into account in the weighting
scheme. Using the latter, the long dispersion investor may lose money even if the realized correlation is
lower than the implied one, especially if realize variance on the Index is far lower than the implied one.
- theta & gamma flat dispersion trade. Under a null risk-free rate framework (cf Assumptions), those
two strategies are very close. In practice, the difference between both is the difference between
the risk free rate and the return of the stocks over the period we consider.

*Gamma flat: the Gamma of the Index is worth the sum of the Gammas of the components. In a
delta-hedged framework, the trader is immune against any move in the stocks but keeps a Vega
position.

*Theta flat: the Theta of the Index is worth the sum of the Thetas of the components. It results
with a short Vega position and a short Gamma position.

Impact of non-constant weights

The market –weighted property of the Index suggests an impact of the non-constant weights on the
correlation behavior, compared to a constant weights assumption. Let’s try to estimate this impact on
dispersion trades (𝜎: realized volatility; K: strike).

As an Index is considered as a Market-Weighted Basket of Stocks, the following relationships stand ∀ 𝑖, 𝑡:


𝐾
1
𝐼𝑛𝑑𝑒𝑥𝑡 = . ∑ 𝑛𝑖,𝑡 . 𝑆𝑖,𝑡
𝑑𝑖𝑣𝑖𝑠𝑜𝑟𝑡
𝑖=1

1
𝑤𝑖,𝑡 = %𝑊𝑒𝑖𝑔ℎ𝑡𝑖,𝑡 = .𝑛 .𝑆
𝑑𝑖𝑣𝑖𝑠𝑜𝑟𝑡 . 𝐼𝑛𝑑𝑒𝑥𝑡 𝑖,𝑡 𝑖,𝑡

Then let’s differentiate a position where we do not change the weights of the assets, and a position where
we adjust at each closing day the vega positions, due to the change in %weights. Volga PNL impact must
be avoided.

Using Variance Swaps, assuming 𝑊𝑖 being any %weight for stock i meaning that:
𝑊𝑖 = 𝑤𝑖
{𝑊 = 𝑤 . 𝜎𝐼𝑛𝑑𝑒𝑥 𝑜𝑟
𝑖 𝑖
𝜎𝑖

𝑉0 =vega notional on the Index Variance Swap

Let’s use a discrete timeframe, 𝑡0 being the inception of the Dispersion Variance Swap trade:
𝑉0
- At 𝑡0 , the vega for each stock i is: . 𝑊𝑖,0
2.𝐾0
- The final PNL of the Variance Swap between 0 and T is:
𝑇
𝑉0 252 𝑆𝑡
.𝑊 .[ . ∑ 𝑙𝑛2 ( ) − 𝐾02 ]
2. 𝐾0 𝑖,0 𝑇 𝑆𝑡−1
𝑡=1

At 𝑡1 , we adjust the Vega position due to the move in weight. The adjustments are made with respect to
𝑉0 in order to avoid any Index Volga linked PNL. Therefore:

*we sell for stock i the Variance Swap maturity T (1 day shorter than the Variance Swap traded in 𝑡0 in
𝐾
order their maturities to match) with strike 𝐾1 , for a vega notional of 𝑉0 . 1 . 𝑊𝑖,0
𝐾0

*we buy for stock i the Variance Swap maturity T with strike 𝐾1 for a vega notional of 𝑉0 . 𝑊𝑖,1

Then, the final position due to position initiated in 𝑡0 , and “closed” in 𝑡1 is:
𝑇 𝑇
𝑉0 252 𝑆1 252 252 𝑆𝑡
.𝑊 .[ . ∑ 𝑙𝑛2 ( ) + (𝐾12 − 𝐾02 ) + ( − ) . ∑ 𝑙𝑛2 ( )]
2. 𝐾0 𝑖,0 𝑇 𝑆0 𝑇 𝑇−1 𝑆𝑡−1
𝑡=1 𝑡=2

Generalizing for n stocks and T days, the PNL of the long volatility position of the Dispersion Trade is:
𝑛 𝑇 𝑇 𝑇
𝑉0 252 𝑆𝑖,𝑡 2 2
252 252 𝑆𝜏
∑∑ .𝑊 .[ . ∑ 𝑙𝑛2 ( ) + (𝐾𝑖,𝑡 − 𝐾𝑖,𝑡−1 )+( − ) . ∑ 𝑙𝑛2 ( )]
2. 𝐾𝑖,𝑡−1 𝑖,𝑡−1 𝑇 − (𝑡 − 1) 𝑆𝑖,𝑡−1 𝑇 − (𝑡 − 1) 𝑇 − 𝑡 𝑆𝜏−1
𝑖=1 𝑡=1 𝑡=1 𝜏=𝑡+1
The PNL of the Dispersion trade with volatile weights is:
𝐼𝑛𝑑𝑒𝑥𝑃𝑁𝐿
⏞ 𝑇 𝑛 𝑇 𝑇 𝑇
𝑉0 2
252 𝑆𝑡,𝐼 𝑉0 252 𝑆𝑖,𝑡 2
252 252 𝑆𝜏
. [𝐾0,𝐼𝑛𝑑𝑒𝑥 − . ∑ 𝑙𝑛²( )] + ∑ ∑ .𝑊 .[ . ∑ 𝑙𝑛2 ( ) + (𝐾𝑖,𝑡 − 𝐾02 ) + ( − ) . ∑ 𝑙𝑛2 ( )]
2. 𝐾0,𝐼𝑛𝑑𝑒𝑥 𝑇 𝑆𝑡−1,𝐼 ⏟ 2. 𝐾𝑖,𝑡−1 𝑖,𝑡−1 𝑇 − (𝑡 − 1) 𝑆𝑖,𝑡−1 𝑇 − (𝑡 − 1) 𝑇 − 𝑡 𝑆𝜏−1
𝑡=1 𝑖=1 𝑡=1 𝑡=1 𝜏=𝑡+1
𝑆𝑡𝑜𝑐𝑘𝑠𝑃𝑁𝐿

Through this strategy, the PNL difference due to weight changes is:
𝑛 𝑇 𝑇 𝑇
𝑉0 252 𝑆𝑖,𝑡 2 2
252 252 𝑆𝜏
∑∑ . (𝑊𝑖,𝑡−1 − 𝑊𝑖 ). [ . ∑ 𝑙𝑛2 ( ) + (𝐾𝑖,𝑡 − 𝐾𝑖,𝑡−1 )+( − ) . ∑ 𝑙𝑛2 ( )]
2. 𝐾𝑖,𝑡−1 𝑇 − (𝑡 − 1) 𝑆𝑖,𝑡−1 𝑇 − (𝑡 − 1) 𝑇 − 𝑡 𝑆𝜏−1
𝑖=1 𝑡=1 𝑡=1 𝜏=𝑡+1

Assuming the existence and the use of 1-day Variance swaps, each day PNL would be:
𝑛
𝑉0 2
𝑆1,𝐼 𝑉0 𝑆1,𝑖 2
. [𝐾0,𝐼𝑛𝑑𝑒𝑥 − 252. 𝑙𝑛2 ( )] + ∑ . 𝑊𝑖,0 . [252. 𝑙𝑛2 ( ) − 𝐾0,𝑖 ]
2. 𝐾
⏟ 0,𝐼𝑛𝑑𝑒𝑥 𝑆0,𝐼 2. 𝐾0,𝑖 𝑆0,𝑖

𝑖=1
𝐼𝑛𝑑𝑒𝑥 𝑃𝑁𝐿 𝑏𝑒𝑡𝑤𝑒𝑒𝑛 𝑡0 𝑎𝑛𝑑 𝑡1 𝑆𝑡𝑜𝑐𝑘𝑠 𝑃𝑁𝐿 𝑏𝑒𝑡𝑤𝑒𝑒𝑛 𝑡0 𝑎𝑛𝑑 𝑡1

Generalizing for T days:


𝑇 𝑛
𝑉𝑡−1 2
𝑆𝑡,𝐼 𝑉𝑡−1 𝑆𝑡,𝑖 2
∑ . [𝐾𝑡−1,𝐼𝑛𝑑𝑒𝑥 − 252. 𝑙𝑛2 ( )] + ∑ .𝑊 . [252. 𝑙𝑛2 ( ) − 𝐾𝑡−1,𝑖 ]
2. 𝐾𝑡−1,𝐼𝑛𝑑𝑒𝑥
⏟ 𝑆𝑡−1,𝐼 2. 𝐾𝑡−1,𝑖 𝑖,𝑡−1 𝑆𝑡−1,𝑖
𝑡=1 ⏟
𝑖=1
𝐼𝑛𝑑𝑒𝑥 𝑃𝑁𝐿 𝑆𝑡𝑜𝑐𝑘𝑠 𝑃𝑁𝐿

Through this strategy, the PNL difference due to weight changes is:
𝑇 𝑛
𝑉𝑡−1 𝑆𝑡,𝑖 2
∑∑ . (𝑊𝑖,𝑡−1 − 𝑊𝑖 ). [252. 𝑙𝑛2 ( ) − 𝐾𝑡−1,𝑖 ]
2. 𝐾𝑡−1,𝑖 𝑆𝑡−1,𝑖
𝑡=1 𝑖=1

Uncia AM is the French specialist of “High Growth” management style. For more information, go to our
website www.uncia-am.com or contact@uncia-am.com

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