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Are there arbitrage gaps in the UK gilt strips market?

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  • Armitage, Seth
  • Chakravarty, Shanti P.
  • Hodgkinson, Lynn
  • Wells, Jo

Abstract

Evidence in financial markets of an opportunity for pure arbitrage, and therefore a violation of the law of one price, is considered an anomaly to be noted. This paper reports an apparent violation of the law of one price between UK government gilts and their separately traded principal and coupon strips over a sample period of nearly 14years. There are persistent price differences, and hence opportunities for arbitrage, after allowance for the bid-ask spread; the strips package tends to be overpriced in relation to the corresponding gilt. The price differences may, in part, be due to a lack of liquidity and stale prices in the strips market.

Suggested Citation

  • Armitage, Seth & Chakravarty, Shanti P. & Hodgkinson, Lynn & Wells, Jo, 2012. "Are there arbitrage gaps in the UK gilt strips market?," Journal of Banking & Finance, Elsevier, vol. 36(11), pages 3080-3090.
    • Handle: RePEc:eee:jbfina:v:36:y:2012:i:11:p:3080-3090
    DOI: 10.1016/j.jbankfin.2012.07.001
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    References listed on IDEAS

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    Cited by:

    1. Pippenger, John, 2015. "Arbitrage and the Law of One Price: Setting the Record Straight," University of California at Santa Barbara, Economics Working Paper Series qt27t4q265, Department of Economics, UC Santa Barbara.
    2. Teplova, Tamara V. & Rodina, Victoria A., 2021. "The reinvestment risk premium in the valuation of British and Russian government bonds," Research in International Business and Finance, Elsevier, vol. 55(C).
    3. Balbás, Alejandro & Peng, Yao, 2015. "Sequential arbitrage measurement in bond markets : theory and empirical applications in the Euro-zone," INDEM - Working Paper Business Economic Series id-15-01, Instituto para el Desarrollo Empresarial (INDEM).

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    More about this item

    Keywords

    Gilt; Arbitrage; Anomalies; Law of one price; Market microstructure;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G19 - Financial Economics - - General Financial Markets - - - Other

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