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Measuring limits of arbitrage in fixed-income markets

Author: Jean-Sébastien Fontaine; Guillaume Nolin; Bank of Canada.
Publisher: [Ottawa] : Bank of Canada, 2017.
Series: Staff working paper (Bank of Canada), 2017-44.
Edition/Format:   eBook : Document : National government publication : EnglishView all editions and formats
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.  Read more...
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Material Type: Document, Government publication, National government publication, Internet resource
Document Type: Internet Resource, Computer File
All Authors / Contributors: Jean-Sébastien Fontaine; Guillaume Nolin; Bank of Canada.
OCLC Number: 1013868599
Language Note: Includes abstract in French.
Notes: "October 2017."
Description: 1 online resource ([iii], 33 pages) : color charts.
Series Title: Staff working paper (Bank of Canada), 2017-44.
Responsibility: by Jean-Sébastien Fontaine and Guillaume Nolin.
More information:

Abstract:

"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"--Abstract, p. ii.

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