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

Jefferson Duarte1; Francis A. Longstaff2; Fan Yu3

1 University of Washington · 2 UCLA Anderson School and the NBER · 3 UC Irvine Health

Review of Financial Studies 2007

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.”

DOI
10.1093/rfs/hhl026
Volume
20 (3)
Pages
769-811
Language
en
Export
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