Risks And returns Of fixed income arbitrage strategies in varying economic environments : a model based on empirical considerations

I propose a discrete time model of financial markets in which an arbitrageur has investment opportunities but faces a number of financial constraints. Investment opportunities arise when the price discrepancy between a pair of similar assets becomes large enough. I propose an innovative way to model the effects of market liquidity and the arbitrage industry's reversion force on a stochastic price discrepancy. I use empirical studies and common literature assumptions to build and calibrate the model. I then run a set of Monte-Carlo simulations to test the model's response to the risks and returns of a number of arbitrage strategies in varying economic conditions. The model's results are in line with a number of theories in the existing literature, and specifically confirm the role of the arbitrageur as a liquidity provider in disturbed market environments.

Department dc:contributor.department

Sloan School of Management.

Grantor dc:publisher

Massachusetts Institute of Technology

Year dc:date.issued

2014

Author dc:creator

• Beunardeau, Roland

Advisor dc:contributor.advisor

• Hui Chen.

• Sloan School of Management.

Statement dc:rights

• M.I.T. theses are protected by copyright. They may be viewed from this source for any purpose, but reproduction or distribution in any format is prohibited without written permission. See provided URL for inquiries about permission.

Licence dc:rights.uri

• http://dspace.mit.edu/handle/1721.1/7582

Language dc:language.iso

eng

Handle dc:identifier.uri

http://hdl.handle.net/1721.1/90233

OAI identifier oai:identifier

oai:dspace.mit.edu:1721.1/90233