Kauppakorkeakoulun julkaisuportaali
Aalto-yliopiston kauppakorkeakoulun gradujen tiedot nyt Aaltodocissa: Aaltodoc-julkaisuarkisto
Kauppakorkeakoulu | Rahoituksen laitos | Rahoitus | 2015
Tutkielman numero: 14172
Yield curve arbitrage in the EUR swap rates market. Replicating the strategies of quantitative arbitrageurs
Tekijä: Karsimus, Lassi
Otsikko: Yield curve arbitrage in the EUR swap rates market. Replicating the strategies of quantitative arbitrageurs
Vuosi: 2015  Kieli: eng
Laitos: Rahoituksen laitos
Aine: Rahoitus
Asiasanat: rahoitus; financing; sijoitusrahastot; investment funds; strategia; strategy
Sivumäärä: 86
» hse_ethesis_14172.pdf pdf  koko: 2 MB (1447865)
Avainsanat: arbitrage; fixed income; trading strategy; hedge fund; alpha

In this thesis, I look into a hedge fund strategy known as a yield curve arbitrage, where arbitrageurs take relative value bets on interest rates. Earlier research has shown that the strategy produces favourable returns in the USD swap rates market in 1988-2004. My objective is to study whether the strategy yields attractive risk-adjusted returns and multifactor alpha in the recent period of 2002-2015 in the EUR swap rates space. I shall employ an enhanced modelling framework to implement the trading strategy. Moreover, I test the replicated strategy returns with respect to high-level and style-specific hedge fund index returns. Finally, I look into whether 'high-noise' periods in the markets coincide with large model-implied mispricing of rates. The empirical objectives of the thesis are linked to literature on yield curve formation and no-arbitrage.


The dataset consists of monthly mid-market observations of constant maturity EUR swap rates for maturities of one to ten years. Also, Hedge Fund Research and Credit Suisse hedge fund index data for both high-level and style-specific indices is employed. Moreover, noise measure data by Jun Pan is employed to study the relationship of replicated returns to the level of noise. The methodology builds on Cox-Ingersoll-Ross and Longstaff-Schwartz two-factor stochastic short-rate models of interest rates. A calibration and trading algorithm is constructed based on these models to replicate the arbitrage strategy returns. Back tested trading is done explicitly out-of-the sample.


The yield curve arbitrage is found to produce attractive risk-adjusted returns and favourable return distributions. Moreover, the alpha of the strategy is statistically and economically significant when controlled by a number of commonly employed risk factors. Additionally, it is found that the replicated arbitrage strategy does not have statistically meaningful connection to neither high-level nor style-specific hedge fund indices. Finally, it is shown that high noise coincides with large model-implied mispricings when the measure of the mispricings is smoothed. No evidence is found in support of the idea that yield curve arbitrage alpha is compensation for carrying tail risk.
Verkkojulkaisut ovat tekijänoikeuden alaista aineistoa. Teokset ovat vapaasti luettavissa ja tulostettavissa henkilökohtaista käyttöä varten. Aineiston käyttö kaupallisiin tarkoituksiin on kielletty.