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Measuring limits of Arbitrage in fixed-income markets

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Authors and Corporations: Fontaine, Jean-Sébastien (Author), Nolin, Guillaume (Author)
Other Authors: Nolin, Guillaume [Author]
Type of Resource: E-Book
Language: English
published:
[Ottawa] Bank of Canada October 2017
Series: Bank of Canada: Staff working paper ; 2017, 44
Source: Verbunddaten SWB
Lizenzfreie Online-Ressourcen
Notes: Zusammenfassung in französischer Sprache
Description
Summary: We use relative value to measure limits to arbitrage in fixed-income markets. Relative value captures apparent deviations from no-arbitrage relationships. It is simple, intuitive and can be computed model-free for any bond. A pseudo-trading strategy based on relative value generates higher returns than one based on the well-known noise measure. The relative value is therefore a better proxy for limits to arbitrage. We construct relative value indices for the US, UK, Japan, Germany, Italy, France, Switzerland and Canada. Limits to arbitrage increase with the scarcity of capital: we find that each index is correlated with local volatility and funding costs. Limits to arbitrage also exhibit strong commonality across countries, consistent with the international mobility of capital. The relative value indices are updated regularly and available publicly.
Physical Description: 1 Online-Ressource (circa 38 Seiten); Illustrationen
Notes: Zusammenfassung in französischer Sprache