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Measuring Limits Of Arbitrage In Fixed‐Income Markets

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  • Jean‐Sébastien Fontaine
  • Guillaume Nolin

Abstract

An emerging literature relies on an index of limits of arbitrage in fixed‐income markets. We analyze the benefits of an index that is model‐free, robust, and intuitive. This new index strengthens the evidence that limits of arbitrage proxy for risks priced in the cross‐section of returns. Trading simulations show that the new index improves identification of limits of arbitrage because it bypasses a noisy estimation step. Relative value indices in the United States, United Kingdom, Japan, Germany, Italy, France, Switzerland, and Canada exhibit strong commonality and high correlations with local volatility and funding conditions. The indices are updated regularly and available publicly.

Suggested Citation

  • Jean‐Sébastien Fontaine & Guillaume Nolin, 2019. "Measuring Limits Of Arbitrage In Fixed‐Income Markets," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 42(3), pages 525-552, September.
  • Handle: RePEc:bla:jfnres:v:42:y:2019:i:3:p:525-552
    DOI: 10.1111/jfir.12187
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    References listed on IDEAS

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    Cited by:

    1. Jean-Sébastien Fontaine & Jabir Sandhu & Adrian Walton, 2019. "Relative Value of Government of Canada Bonds," Staff Analytical Notes 2019-23, Bank of Canada.
    2. Jeffrey Gao & Jianjian Jin & Jacob Thompson, 2018. "The Impact of Government Debt Supply on Bond Market Liquidity: An Empirical Analysis of the Canadian Market," Staff Working Papers 18-35, Bank of Canada.
    3. Livingston, Miles & Wu, Yanbin & Zhou, Lei, 2019. "The decline in idiosyncratic values of US Treasury securities," Journal of Banking & Finance, Elsevier, vol. 107(C), pages 1-1.
    4. Jessica Lee & Jabir Sandhu & Adrian Walton, 2019. "Borrowing Costs for Government of Canada Treasury Bills," Staff Analytical Notes 2019-28, Bank of Canada.
    5. Corey Garriott & Sophie Lefebvre & Guillaume Nolin & Francisco Rivadeneyra & Adrian Walton, 2020. "Alternative futures for Government of Canada debt management," Journal of Financial Economic Policy, Emerald Group Publishing, vol. 12(4), pages 659-685, January.
    6. Narayan Bulusu & Sermin Gungor, 2018. "Government of Canada Securities in the Cash, Repo and Securities Lending Markets," Discussion Papers 18-4, Bank of Canada.

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    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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