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Editor: Universidad Carlos III de Madrid. Instituto para el Desarrollo Empresarial INDEM

Issued date: 2015-01-14

ISSN: 1989-8843

Serie-No.: Working paper. Business economic series15-01

Keywords: Portfolio optimization , Sequential arbitrage measurement , Pricing error , Sovereign debt , Euro crisis , Unión Europea

Rights: Atribución-NoComercial-SinDerivadas 3.0 España

Abstract:We develop a mathematical programing approach in order to measure the arbitrage size in bond markets. Transaction costs may be incorporated. The obtained arbitrage measures have two interesting interpretations: On the one hand they provide the highest availablWe develop a mathematical programing approach in order to measure the arbitrage size in bond markets. Transaction costs may be incorporated. The obtained arbitrage measures have two interesting interpretations: On the one hand they provide the highest available arbitrage profit with respect to the price of the sold bought securities. On the other hand they give the minimum relative per dollar bid ask price modification leading to an arbitrage free market. Moreover, some primal problems lead to optimal arbitrage strategies if available, while their dual problems generate proxies for the Term Structure of Interest Rates. The developed methodology permits us to implement an empirical test in the Euro-zone during the Euro crisis. Classical literature justifies the relevance of empirical analyses verifying the degree of efficiency during market turmoils. Our empirical study of the German, French and Spanish sovereign bonds markets finds that the main arbitrage opportunities come from the price differences between maturity-matched strips or -On-The-Run Premium- for zero-coupon bonds. When we remove the strips and the zero-coupon bonds the arbitrage still exists in the Spanish market.+-





Autor: Balbas de la Corte, Alejandro; Peng, Yao

Fuente: http://e-archivo.uc3m.es


Introducción



Universidad Carlos III de Madrid Repositorio institucional e-Archivo http:--e-archivo.uc3m.es Instituto para el desarrollo empresarial (INDEM) INDEM - Working Paper Business Economic Series 2015-01-14 Sequential arbitrage measurement in bond markets : theory and empirical applications in the Euro-zone Balbas de la Corte, Alejandro http:--hdl.handle.net-10016-19879 Descargado de e-Archivo, repositorio institucional de la Universidad Carlos III de Madrid UNIVERSIDAD CARLOS III DE MADRID Working Paper Business Economic Series WP.
15-01 ISSN 1989-8843 WORKING PAPERS Instituto para el Desarrollo Empresarial. Universidad Carlos III de Madrid C- Madrid, 126 28903 Getafe Madrid (Spain) FAX (34)-916249607 Sequential arbitrage measurement in bond markets: Theory and empirical applications in the Euro-zone Alejandro Balbás1 Departamento de Economía e la Empresa Universidad Carlos III de Madrid Yao Peng2 Departamento de Economía e la Empresa Universidad Carlos III de Madrid 1 2 C- Madrid, 126.
28903 Getafe (Madrid, Spain). C- Madrid, 126.
28903 Getafe (Madrid, Spain). Sequential arbitrage measurement in bond markets: Theory and empirical applications in the Euro-zone Alejandro Balbás∗ and Yao Peng† January 14, 2015 Abstract We develop a mathematical programing approach in order to measure the arbitrage size in bond markets.
Transaction costs may be incorporated. The obtained arbitrage measures have two interesting interpretations: On the one hand they provide the highest available arbitrage profit with respect to the price of the sold (bought) securities.
On the other hand they give the minimum relative (per dollar) bid (ask) price modification leading to an arbitrage free market.
Moreover, some primal problems lead to optimal arbitrage strategies (if available), while their dual problems generate proxies for the Term Structure of Interest Rates. The developed methodology permits us to implement an empirical test in the Euro-zone during the Euro crisis...





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