The Risk and Return Characteristics of the U.S. Treasury Basis Trade
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- Master of Science 
We conduct an analysis of the risk and return characteristics of the U.S. Treasury basis trade by regressing the strategy returns of the 2-year, 5-year and 10-year futures contracts on a variety of bond and equity market risk factors. We find that over the full sample period from January 1, 1992 to March 31, 2023, the 5-year strategy generates a positively significant alpha without loading on any risk factors, whereas the 2-year strategy generates no significant alpha, and the 10-year strategy generates a negatively significant alpha, with little explanatory power even though they load on some risk factors. In the more recent sample period from August 31, 2007 to March 31, 2023, the 2-year strategy and the 5-year strategy generated highly significant alphas, which coincides with hedge fund interest in the basis trade. Further we cannot rule out that the significant alphas observed in the 2-year or 5-year contracts might stem from limits to arbitrage.
Masteroppgave(MSc) in Master of Science in Business, Finance - Handelshøyskolen BI, 2023