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Identifying Statistical Arbitrage in Interest Rate Markets: A Genetic Algorithm Approach

Author

Listed:
  • J. C. Arismendi-Zambrano

    (Department of Economics, Finance and Accounting, Maynooth University, Ireland & ICMA Centre, Henley Business School, University of Reading, Whiteknights, Reading, United Kingdom.)

  • T. Ramos-Almeida

    (Federal University of Bahia, UFBA, Salvador, Brazil.)

  • J. C. Reboredo

    (Department of Economics, University of Santiago de Compostela, Santiago de Compostela, Spain.)

  • M. A. Rivera-Castro

    (University of Salvador (UNIFACS), Salvador, Brazil. Department of Applied Social Sciences, State University of Feira de Santana, Feira de Santana, Brazil.)

Abstract

In this paper a multidimensional term structure model is used to find statistical arbitrage opportunities in the interest rates derivatives market. The implied volatility of the model is calibrated by using a genetic algorithm optimization method. Two different options over the same underlying interest rate asset are tested, using data from a weak efficient economy market - Brazilian derivatives market. The results show that there is no systematic mispricing between these two options, but temporary arbitrage opportunities perceptible to the average informed trader are possible.

Suggested Citation

  • J. C. Arismendi-Zambrano & T. Ramos-Almeida & J. C. Reboredo & M. A. Rivera-Castro, 2020. "Identifying Statistical Arbitrage in Interest Rate Markets: A Genetic Algorithm Approach," Economics Department Working Paper Series n305-20.pdf, Department of Economics, National University of Ireland - Maynooth.
    • Handle: RePEc:may:mayecw:n305-20.pdf
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Interest Rates Derivatives; Financial Economics; Arbitrage; Swaption-Cap Puzzle;
    All these keywords.

    JEL classification:

    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques

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