Correlation Between Southwest Airlines and American Airlines

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

By analyzing existing cross correlation between Southwest Airlines and American Airlines Group, you can compare the effects of market volatilities on Southwest Airlines and American Airlines 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 Southwest Airlines with a short position of American Airlines. Check out your portfolio center. Please also check ongoing floating volatility patterns of Southwest Airlines and American Airlines.

Diversification Opportunities for Southwest Airlines and American Airlines

0.84

Correlation Coefficient

Southwest Airlines  American Airlines

Very poor diversification

The 3 months correlation between Southwest and American is 0.84. Overlapping area represents the amount of risk that can be diversified away by holding Southwest Airlines and American Airlines Group in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on American Airlines and Southwest Airlines 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 Southwest Airlines are associated (or correlated) with American Airlines. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of American Airlines has no effect on the direction of Southwest Airlines i.e., Southwest Airlines and American Airlines go up and down completely randomly.

Pair Corralation between Southwest Airlines and American Airlines

Considering the 90-day investment horizon Southwest Airlines is expected to generate 13.03 times less return on investment than American Airlines. But when comparing it to its historical volatility, Southwest Airlines is 1.28 times less risky than American Airlines. It trades about 0.0 of its potential returns per unit of risk. American Airlines Group is currently generating about 0.05 of returns per unit of risk over similar time horizon. If you would invest  1,056  in American Airlines Group on May 7, 2025 and sell it today you would earn a total of  71.00  from holding American Airlines Group or generate 6.72% return on investment over 90 days.

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

Southwest Airlines  vs.  American Airlines Group

Southwest Airlines

Risk-Adjusted Performance

Weak

Over the last 90 days Southwest Airlines has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of fairly stable basic indicators, Southwest Airlines is not utilizing all of its potentials. The latest stock price fuss, may contribute to near-short-term losses for the sophisticated investors.

American Airlines

Risk-Adjusted Performance

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in American Airlines Group are ranked lower than 3 (%) of all global equities and portfolios over the last 90 days. Despite quite conflicting basic indicators, American Airlines may actually be approaching a critical reversion point that can send shares even higher in September 2025.

Pair Trading with Southwest Airlines and American Airlines

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

The idea behind Southwest Airlines and American Airlines Group 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.

Check out your portfolio center.

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 Volatility Analysis module to get historical volatility and risk analysis based on latest market data.