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Bayesian Arbitrage Threshold Analysis

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  • Forbes, Catherine S
  • Kalb, Guyonne R J
  • Kofman, Paul

Abstract

A Bayesian estimation procedure is developed for estimating multiple-regime (multiple-threshold) error-correction models appropriate for deviations from financial arbitrage relationships. This approach has clear advantages over classical stepwise threshold autoregressive analysis. Unlike many other applications of threshold models, the knowledge of some costs involved in setting up arbitrage positions allows the authors to specify an informative prior. To illustrate the Bayesian procedure, they estimate a no-arbitrage band within which index futures arbitrage is not profitable despite (persistent) deviations from parity.

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Bibliographic Info

Article provided by American Statistical Association in its journal Journal of Business and Economic Statistics.

Volume (Year): 17 (1999)
Issue (Month): 3 (July)
Pages: 364-72

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Handle: RePEc:bes:jnlbes:v:17:y:1999:i:3:p:364-72

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Cited by:
  1. Tse, Yiuman, 2001. "Index arbitrage with heterogeneous investors: A smooth transition error correction analysis," Journal of Banking & Finance, Elsevier, vol. 25(10), pages 1829-1855, October.
  2. Bajo-Rubio, Oscar & Diaz-Roldan, Carmen & Esteve, Vicente, 2006. "Is the budget deficit sustainable when fiscal policy is non-linear? The case of Spain," Journal of Macroeconomics, Elsevier, vol. 28(3), pages 596-608, September.
  3. Alexakis, Christos, 2010. "Long-run relations among equity indices under different market conditions: Implications on the implementation of statistical arbitrage strategies," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 20(4), pages 389-403, October.
  4. Greb, Friederike & Krivobokova, Tatyana & von Cramon-Taubadel, Stephan & Munk, Axel, 2011. "On threshold estimation in threshold vector error correction models," 2011 International Congress, August 30-September 2, 2011, Zurich, Switzerland 114599, European Association of Agricultural Economists.
  5. Byeongseon Seo, 2004. "Testing for Nonlinear Adjustment in Smooth Transition Vector Error Correction Models," Econometric Society 2004 Far Eastern Meetings 749, Econometric Society.
  6. Hu, Jin-Li & Lin, Cheng-Hsun, 2008. "Disaggregated energy consumption and GDP in Taiwan: A threshold co-integration analysis," Energy Economics, Elsevier, vol. 30(5), pages 2342-2358, September.
  7. Shively, Philip A., 2003. "The nonlinear dynamics of stock prices," The Quarterly Review of Economics and Finance, Elsevier, vol. 43(3), pages 505-517.

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