University of Oulu

Fixed-income arbitrage strategies: swap spread arbitrage and yield curve arbitrage

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Author: De Figueiredo Neto, Carlos1
Organizations: 1University of Oulu, Oulu Business School, Department of Finance, Finance
Format: ebook
Version: published version
Access: open
Online Access: PDF Full Text (PDF, 2.6 MB)
Pages: 65
Persistent link:
Language: English
Published: Oulu : C. De Figueiredo Neto, 2012
Publish Date: 2013-09-30
Thesis type: Master's thesis
Tutor: Kahra, Hannu
Reviewer: Joenväärä, Juha
Kahra, Hannu


There is a mythical question, well described by Duarte, Longstaff and Yu (2006), whether fixed-income arbitrage strategies are truly arbitrage or merely strategies that earn small positive returns most of the time, but occasionally experience dramatic losses. The question can be summarized in the anecdote “picking up nickels in front of a steamroller”. This master’s thesis studies two of these specific fixed-income arbitrage strategies: Swap Spread Arbitrage and Yield Curve Arbitrage.

The methodology used in this master’s thesis is to apply these two arbitrage strategies through time from November 1988 to December 2011, using R language coding developed by the author of the master’s thesis, and to analyze their risk and return characteristics. The data used in this master’s thesis was gathered from different sources such as: Bloomberg™, Federal Reserve System (FED), Thompson Reuters Datastream™, Federal Reserve Bank of St. Louis, Kenneth French and Yahoo® Finance.

The main hypothesis of this thesis is that the global financial crisis of 2008 had a big impact on these strategies return indexes. This proved to be wrong. These two fixed-income arbitrage strategies seem profitable on the long run even under financial crisis cycles, as they generate positive excess returns, and Yield Curve Arbitrage strategy even with significant α.

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Copyright information: © Carlos De Figueiredo Neto, 2012. This publication is copyrighted. You may download, display and print it for your own personal use. Commercial use is prohibited.