Risk and return characteristics of the swap spread arbitrage strategy

Abstract

We conduct a study on the risk and return characteristics of the swap spread arbitrage strategy. Specifically, we investigate the two-year, three-year, five-year, seven-year, ten-year, and an equally-weighted swap spread strategy in the US, the UK, and Japan. We find that there is very little “arbitrage” in this fixed income trading strategy. Furthermore, our findings suggest that the less liquid markets offer better risk and return characteristics than the more liquid markets.