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

53 Pages Posted: 28 Dec 2005

See all articles by Jefferson Duarte

Jefferson Duarte

Rice University

Francis A. Longstaff

University of California, Los Angeles (UCLA) - Finance Area

Fan Yu

Claremont McKenna College - Robert Day School of Economics and Finance

Date Written: March 2006

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. These positive alphas remain significant even after taking into account typical hedge fund fees. In contrast with other hedge fund strategies, 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."

Suggested Citation

Duarte, Jefferson and Longstaff, Francis A. and Yu, Fan, Risk and Return in Fixed Income Arbitrage: Nickels in Front of a Steamroller? (March 2006). Available at SSRN: https://ssrn.com/abstract=872004 or http://dx.doi.org/10.2139/ssrn.872004

Jefferson Duarte

Rice University ( email )

6100 South Main Street
P.O. Box 1892
Houston, TX 77005-1892
United States
713.3486137 (Phone)

Francis A. Longstaff

University of California, Los Angeles (UCLA) - Finance Area ( email )

Los Angeles, CA 90095-1481
United States
310-825-2218 (Phone)
310-206-5455 (Fax)

Fan Yu (Contact Author)

Claremont McKenna College - Robert Day School of Economics and Finance ( email )

500 E. Ninth St.
Claremont, CA 91711-6420
United States
(909)607-3345 (Phone)

HOME PAGE: http://www.cmc.edu/academic/faculty/profile.asp?Fac=553

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