| dc.description.abstract | This thesis extends the research of Duarte, Longstaff and Yu (2007) by looking at the risk and
return characteristics of yield curve arbitrage. Like in Duarte et al., return indexes are created
by implementing a particular version of the strategy on historical data. We extend the analysis
to include both USD and EUR swap markets. The sample period is from 2006-2020, which is
more recent than in Duarte et al. (1988-2004). While the USD strategy produces risk-adjusted
excess returns of over five percent per year, the EUR strategy underperforms, which we argue
is a result of the term structure model not being well suited to describe the abnormal shape of
the EUR swap curve that manifests over much of the sample period. For both USD and EUR,
performance is much better over the first half of the sample (2006-2012) than over the second
half (2013-2020), which coincides with a fall in swap rate volatility. Still, risk factor exposure
is low for both strategies, though it is higher for USD than for EUR. We conclude that there is
potential for risk-adjusted excess returns in yield curve arbitrage, but that the strategy suffers
when there are structural changes in the shape and volatility of t he term structure. | en_US |
