Measuring Limits of Arbitrage in Fixed-Income Markets

45 Pages Posted: 28 Sep 2018 Last revised: 9 Aug 2019

Date Written: September 10, 2018

Abstract

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 US, the UK, 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.

Keywords: Limits of Arbitrage, Fixed-Income, Sovereign Bonds

JEL Classification: G12

Suggested Citation

Fontaine, Jean-Sebastien and Nolin, Guillaume, Measuring Limits of Arbitrage in Fixed-Income Markets (September 10, 2018). Available at SSRN: https://ssrn.com/abstract=3247184 or http://dx.doi.org/10.2139/ssrn.3247184

Jean-Sebastien Fontaine (Contact Author)

Bank of Canada ( email )

234 Wellington Street
Ontario, Ottawa K1A 0G9
Canada

HOME PAGE: http://www.jean-sebastienfontaine.com

Guillaume Nolin

Bank of Canada ( email )

234 Wellington
Ottawa, Ottawa K1A 0G9
Canada
6137828648 (Phone)

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