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Risk and Return in Fixed Income Arbitage: Nickels in Front of a Steamroller?

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  • Duarte, Jefferson
  • Longstaff, Francis A.
  • Yu, Fan
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    Abstract

    We conduct an analysis of the risk and return characteristics of a number of widely used fixed income arbitrage strategies. We find that the strategies requiring more “intellectual capital†to implement tend to produce significant alphas after controlling for bond and equity market risk factors. We show that the risk-adjusted excess returns from these strategies are related to capital flows into fixed income arbitrage hedge funds. In contrast with other hedge fund strategies, we find that many of the fixed income arbitrage strategies produce positively skewed returns. These results suggest that there may be more economic substance to fixed income arbitrage than simply “picking up nickels in front of a steamroller.â€

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    Paper provided by Anderson Graduate School of Management, UCLA in its series University of California at Los Angeles, Anderson Graduate School of Management with number qt6zx6m7fp.

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    Date of creation: 03 Jun 2005
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    Handle: RePEc:cdl:anderf:qt6zx6m7fp

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    Cited by:
    1. Kessler, Stephan & Scherer, Bernd, 2009. "Varying risk premia in international bond markets," Journal of Banking & Finance, Elsevier, vol. 33(8), pages 1361-1375, August.
    2. Kalimipalli, Madhu & Nayak, Subhankar, 2012. "Idiosyncratic volatility vs. liquidity? Evidence from the US corporate bond market," Journal of Financial Intermediation, Elsevier, vol. 21(2), pages 217-242.
    3. William K.H. Fung & David A. Hsieh, 2006. "Hedge funds: an industry in its adolescence," Economic Review, Federal Reserve Bank of Atlanta, issue Q 4, pages 1-34.

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