Profitability of butterfly trades in bond markets Pal, Satyajit en_US 2022-03-16T18:16:28Z 2022-03-16T18:16:28Z 2007 en_US
dc.description.abstract The Efficient Market Hypothesis (EMH) has had significant impact on the theory and practice of investments. However technical trading rules have continued to be used by practioners and have been the focus of many academic studies which have focused on equity, foreign exchange and futures markets. The scarcity of research into technical trading models for fixed income markets is astonishing considering the significant size and consequent investor importance of fixed income markets relative to other financial markets and the extensive application of technical trading models by market participants. This is one of the few studies that develops a technical trading model applicable to fixed income markets. Black (1986) defined Efficient Markets as a market where deviations from fundamental values were short lived and small in magnitude. Fundamental asset values are hard to calculate, but we are able to identify fundamental values for a set of Government Bonds on the principle that yield relativities between such bonds are quite stable except for 'deliberate' changes in trading behaviour. We find that the deviations from fundamental value are short lived and small in magnitude. We exploit deviations from fundamental value by Butterfly Trading strategies; Normal Butterfly trades earning returns from movements in yield curve slope and curvature and Arbitrage Butterfly trades earning returns from yield curve curvature only. After considering transaction costs, we achieve annualised returns of 120bps from our Normal Butterfly trades and 72 bps from our Arbitrage Butterfly trades. Consistent with the risk-return relationship for financial instruments, we find that the returns and the volatility of returns for Normal Butterfly trades are higher than the returns and volatility of returns for Arbitrage Butterfly trades. Normal Butterfly trades are exposed to yield curve slope changes whereas Arbitrage Butterfly trades are not, resulting in higher risk and higher returns for Normal Butterfly trades. This finding is consistent with the results obtained by Fabozzi, Martellini and Priaulet (2005). en_US
dc.language English
dc.language.iso EN en_US
dc.publisher UNSW, Sydney en_US
dc.rights CC BY-NC-ND 3.0 en_US
dc.rights.uri en_US
dc.source Thesis Digitisation Program en_US
dc.subject.other Bond market. en_US
dc.subject.other Efficient market theory. en_US
dc.title Profitability of butterfly trades in bond markets en_US
dc.type Thesis en_US
dcterms.accessRights open access
dcterms.rightsHolder Pal, Satyajit
dspace.entity.type Publication en_US
unsw.relation.faculty Business
unsw.relation.originalPublicationAffiliation Pal, Satyajit, Banking & Finance, Australian School of Business, UNSW en_US School of Banking & Finance *
unsw.thesis.degreetype Masters Thesis en_US
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