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Title: | The efficiency of the Estr overnight index swap market |
Authors: | Realdon, M |
Keywords: | Estr overnight index swaps;offline pricing models;pricing errors;delta-hedging;market-neutral arbitrage portfolios;transaction costs |
Issue Date: | 26-Jan-2024 |
Publisher: | Elsevier |
Citation: | Realdon, M. (2024) 'The efficiency of the Estr overnight index swap market', Journal of International Financial Markets, Institutions and Money, 91, 101943, pp. 1 - 16. doi: 10.1016/j.intfin.2024.101943. |
Abstract: | This paper studies the profitability of market-neutral delta-hedged strategies trading the mispricing of Euro Short Term Rate Overnight Index Swaps (Estr OIS) signalled by standard affine term structure models. Calibrating these models produces pricing errors that signal mispricing and the deltas to hedge market risk. The paper presents simple-to-compute portfolio weights that maximise the OIS arbitrage portfolio information ratio subject to market-neutral delta-hedge constraints and subject to bid–ask spreads. The empirical evidence shows that only investors who can “split” the bid–ask spread can profitably exploit the pricings errors signalled by these models. Investors who can only ever trade at the bid or at the ask cannot profit. Pricing errors are strongly positively auto-correlated, which hampers the profitability of trades that expect the correction of such errors. These results imply that the Estr OIS market is quite efficient and are robust to a number of models and strategies. Four and five factor models are more profitable than three factor ones. Assuming that some OIS rates are observed without error reduces the profitability of models and strategies. |
Description: | JEL classification: G12; G13. Data availability: Data will be made available on request. |
URI: | https://bura.brunel.ac.uk/handle/2438/28013 |
ISSN: | 1042-4431 |
Other Identifiers: | ORCID iD: Marco Realdon https://orcid.org/0000-0002-4160-4463 101943 |
Appears in Collections: | Dept of Economics and Finance Embargoed Research Papers |
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FullText.pdf | Embargoed until 26 January 2026 | 215.18 kB | Adobe PDF | View/Open |
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