In much the same way that a company’s valuation varies due to business condition uncertainty and its cost of capital, so the broad market can be modeled based on its capital structure. Through years of ‘capital structure arbitrage’ experience in the credit derivative markets, Capital Context has created the ‘SPY Arb’ model which identifies a tradable relationship between the stock market (SPY) and its value implied from interest rates (TLT), credit risk (HYG), and volatility (VXX). Our framework enables an active trader to take relatively low-risk balanced trades to take advantage of mis-alignments between the various broad measures of risk in the capital markets via extremely liquid ETFs.
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To trade the model against SPY, either buy the Model and sell SPY or sell the Model and buy SPY. The weights listed above are for buying. To sell, multiple the listed weights by -1 (minus one). A negative weight indicates a short position.