St.Petersburg Economic seminar (HSE, EU, PDMI) on April, 29: Bohumil Stádník (Prague University of Economics and Business)

Topic: Convexity Arbitrage – the Idea Which Does Not Work
Date & Time: April, 29; 18:00 - 19:00
Where: online platform Zoom

Bohumil Stádník (Prague University of Economics and Business) will give a talk on Convexity Arbitrage – the Idea Which Does Not Work.
Time: 18:00 - 19:00

Abstract: Nowadays popular algorithmic trading uses many strategies which are algoritmizable and promise profitability. This research answers if it is possible to successfully use convexity arbitrage strategy in the bond portfolio in financial praxis. Convexity arbitrage has already been described in the literature, but an assessment of its practical success is missing.
Portfolio of two bonds is constructed (theoretically and practically) to have the same Macaulay duration and price, but a different convexity at a certain YTM point. Therefore, being long the first bond while shorting the second (with higher convexity) would result in a market-directional bet for parallel zero-coupon yield curve shifts. Methodology: mathematical definition of this arbitrage; construction of sufficient portfolio; back-testing on USD and EUR zero curves.
To construct practically the portfolio which is sufficient for the convexity arbitrage could be unrealistic on markets with low liquidity, moreover, the presumption of parallel yield shifts is not fulfilled enough to ensure the arbitrage is profitable.
The research helps practitioners considering this strategy for its implementation to algorithmic trading to make an adequate assessment. Important results for financial practitioners state that practical and profitable utilization of convexity arbitrage is unrealizable.

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