Is Risk Arbitrage Compensated? Evidence from the European STRIPS Market

19 Pages Posted: 28 Jun 2010 Last revised: 2 Jul 2010

See all articles by Joop Huij

Joop Huij

Erasmus University - Rotterdam School of Management; Robeco; Erasmus University Rotterdam (EUR) - Erasmus Research Institute of Management (ERIM)

Miles Livingston

University of Florida - Department of Finance, Insurance and Real Estate

Laurens Swinkels

Erasmus University Rotterdam (EUR); Robeco Quantitative Investments

Date Written: June 24, 2010

Abstract

Previous published studies document price differences between principal and coupon strips although both securities promise identical cash flows at maturity. This paper gauges the economic significance of this apparent anomaly and investigates if holders of the higher-priced strips can exploit the observed price differences by switching to lower-priced strips. Our empirical analysis of the main European strips markets finds that potential switching profits are economically very small. Switching operations by investors keep prices of principal and coupon strips very close to one another. Investors are only marginally compensated for the risks of risk arbitrage in the European strips market.

Keywords: Arbitrage, Bonds, Risk Arbitrage, Strips

JEL Classification: G11, G12, G14

Suggested Citation

Huij, Joop and Livingston, Miles B. and Swinkels, Laurens, Is Risk Arbitrage Compensated? Evidence from the European STRIPS Market (June 24, 2010). Available at SSRN: https://ssrn.com/abstract=1629726 or http://dx.doi.org/10.2139/ssrn.1629726

Joop Huij

Erasmus University - Rotterdam School of Management ( email )

P.O. Box 1738
Rotterdam, 3000 DR
Netherlands

HOME PAGE: http://www.rsm.nl/jhuij

Robeco

Rotterdam, 3014DA
Netherlands

HOME PAGE: http://www.robeco.com/

Erasmus University Rotterdam (EUR) - Erasmus Research Institute of Management (ERIM)

P.O. Box 1738
Rotterdam, 3000 DR
Netherlands

Miles B. Livingston

University of Florida - Department of Finance, Insurance and Real Estate ( email )

P.O. Box 117168
Gainsville, FL 32611-7168
United States
352-392-4316 (Phone)
352-392-0301 (Fax)

Laurens Swinkels (Contact Author)

Erasmus University Rotterdam (EUR) ( email )

Burgemeester Oudlaan 50
3000 DR Rotterdam, Zuid-Holland 3062PA
Netherlands

Robeco Quantitative Investments ( email )

Rotterdam, 3000
Netherlands
+31 10 224 2470 (Phone)
+31 10 224 2110 (Fax)

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
255
Abstract Views
1,858
rank
130,431
PlumX Metrics