Dividend Trading on the Euro Stoxx 50 Index: A Relation to the Hedging of Structured Products

Helle BundgÄrd Knudsen & Frederik Dilling-Hansen

Student thesis: Master thesis

Abstract

Recent evidence of a downward sloping dividend price curve for the Euro Stoxx 50 index constitutes an interesting investment opportunity. In this thesis, we relate the imbalances on the dividend curve to the hedging caused by issuance of structured products. We examine how the imbalances on the dividend curve can be exploited optimally in a trading strategy by analyzing the performance of dif-ferent trading strategies in the period from 2010 to 2019. We find that the optimal way to create dividend exposure is through synthetic forwards. Furthermore, we find that the most attractive expo-sure is to the two-year dividends with a short holding period. We argue that this is due to a large dividend supply for this horizon causing a downward pressure on dividend prices. Combined with a strong pull-to-par effect on this part of the dividend curve this provides an attractive carry roll. The optimal trading strategy outperforms both the underlying index and equities in general represented by the S&P 500 index. We suggest that the outperformance is valid even when trading costs are accounted for, although the holding period should be slightly increased.

EducationsMSc in Finance and Investments, (Graduate Programme) Final ThesisMSc in Finance and Accounting, (Graduate Programme) Final Thesis
LanguageEnglish
Publication date2020
Number of pages121
SupervisorsFabrice Tourre