MEASURING LIMITS OF ARBITRAGE IN FIXED‐INCOME MARKETS

MEASURING LIMITS OF ARBITRAGE IN FIXED‐INCOME MARKETS

An emerging literature relies on an index of limits of arbitrage in fixed‐income markets. We analyze the benefits of an index that is model‐free, robust, and intuitive. This new index strengthens the evidence that limits of arbitrage proxy for risks priced in the cross‐section of returns. Trading si...

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Veröffentlicht in:The Journal of financial research 2019-09, Vol.42 (3), p.525-552
Hauptverfasser: Fontaine, Jean‐Sébastien, Nolin, Guillaume
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Sprache:eng
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Arbitrage
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creator Fontaine, Jean‐Sébastien
Nolin, Guillaume
description An emerging literature relies on an index of limits of arbitrage in fixed‐income markets. We analyze the benefits of an index that is model‐free, robust, and intuitive. This new index strengthens the evidence that limits of arbitrage proxy for risks priced in the cross‐section of returns. Trading simulations show that the new index improves identification of limits of arbitrage because it bypasses a noisy estimation step. Relative value indices in the United States, United Kingdom, Japan, Germany, Italy, France, Switzerland, and Canada exhibit strong commonality and high correlations with local volatility and funding conditions. The indices are updated regularly and available publicly.
doi_str_mv 10.1111/jfir.12187
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title MEASURING LIMITS OF ARBITRAGE IN FIXED‐INCOME MARKETS
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