Integration and arbitrage in the Spanish financial markets: An empirical approach*

Lópezyz

2001

SSRN Journal

Self Cite

Abstract. This paper empirically tests the level of sequential arbitrage in the Spanish bond market. The test is implemented by drawing on default free and option free pure discount and coupon bonds issued by the Spanish government. This fact seems to be a clear distinction between this paper and the related empirical literature since there are no risky bonds or derivative securities involved in our analysis. As a consequence, the sequential arbitrage absence is just equivalent to the existence of a term structure of interest rates matching the whole set of bond prices as provided by The Bank of Spain. Thus, the main conclusions seem to be robust because they only depend on very general and simple hypotheses and, particularly, no dynamic assumptions are required. The results of the empirical analysis may be useful to traders and researchers since it seems to reveal the existence of sequential arbitrage. Furthermore, the number of arbitrage opportunities signi…cantly increased in 1998, when important innovations were implemented and, amongst other new possibilities, agents began trading each whole bond and its coupons (strips) separately. The inexperience associated with …nancial innovations may lead to ine¢ciencies in the market.

Section: Market Data Empirical Results and Examplesmentioning

confidence: 99%

Section: Preliminaries Notations and Theoretical Backgroundmentioning

confidence: 99%

Financial Innovation and Arbitrage in the Spanish Bond Market

Lópezyz

2001

SSRN Journal

Self Cite

“…The methodology of Balbás et al. (, ) was related to the profits generated by the arbitrageur. We will be inspired by this approach in order to measure the

G D

size, since it will enable a measure in monetary terms.…”

Section: Gd Indicesmentioning

confidence: 99%

Good deal indices in asset pricing: actuarial and financial implications

Int Trans Operational Res

Garrido

Okhrati

2017

Self Cite

We integrate into a single optimization problem a risk measure, beyond the variance, and either arbitrage-free real market quotations or financial pricing rules generated by an arbitrage-free stochastic pricing model. A sequence of investment strategies such that the couple (expected return, risk) diverges to (+∞, −∞) will be called a good deal (GD). The existence of such a sequence is equivalent to the existence of an alternative sequence of strategies such that the couple (risk, price) diverges to (−∞, −∞). Moreover, by appropriately adding the riskless asset, every GD may generate a new one only composed of strategies priced at one. We will see that GDs often exist in practice, and the main objective of this paper will be to measure the GD size. The provided GD indices will equal an optimal ratio between both risk and price, and there will exist alternative interpretations of these indices. They also provide the minimum relative (per dollar) price modification that prevents the existence of GDs. Moreover, they will be a crucial instrument to detect those securities or marketed claims that are over-or underpriced. Many classical actuarial and financial optimization problems may generate wrong solutions if the used market quotations or stochastic pricing models do not prevent the existence of GDs. This fact is illustrated in the paper, and we point out how the provided GD indices may be useful to overcome this caveat. Numerical experiments are also included. Keywords: risk measure; compatibility between prices and risks; good deal size measurement; actuarial and financial implications A. Balbás et al. / Intl. Trans. in Op. Res. 26 (2019) are combined in a single problem, one often faces the existence of sequences of investment strategies (good deals or GDs) whose pairs (expected return, risk) diverge to (+∞, −∞). The existence of GDs is equivalent to the existence of alternative sequences of investment strategies whose pairs (risk, price) diverge to (−∞, −∞). This pathological finding has been analyzed in Balbás and Balbás (2009) and Balbás et al. (2016a), where explicit examples of the sequences above have been constructed and their performance empirically tested. The main conclusion was that the divergence of (expected return, risk) to (+∞, −∞) is more theoretical than real, but the performance of the constructed GD was good enough. The GD were collections of options providing much better realized Sharpe ratios than their underlying assets.In this paper, we will deal with a couple (ρ, ) composed of the risk measure ρ and the pricing rule . The pair (ρ, ) will be called noncompatible if it implies the existence of a GD, and the main objective of this paper will be the measurement of the GD size by means of a new index denoted byÑ orÑ(ρ, ). An important precedent in financial theory is the notion of arbitrage. Although the absence of arbitrage always holds in theoretical approaches, real market quotations sometimes reflect the existence of arbitrage. For this reason, some years ago many authors defined severa...

“…However, the German Bund Future presents an interesting property since it only contains quality options, and no more options are simultaneously embedded. 10 We follow the ideas and precision of the empirical study of Balbás et al (2000), where the level of integration between the Spanish spot and derivative markets is verified by using a similar database.…”

mentioning

confidence: 99%

On the future contract quality option: a new look

Applied Financial Economics

Reichardt

2010

Self Cite

The paper provides a new method to replicate and price the quality options usually embedded in many future contracts. The replicating strategies may draw on both the future contract and its related calls and puts. They also yield the quality option theoretical price in perfect markets, as well as upper and lower bounds for its bid or ask prices if frictions are incorporated. With respect to previous literature, this new approach seems to reflect four contributions: Firstly, the analysis does not depend on any dynamic assumption concerning the TSIR behaviour, secondly, it incorporates the information contained in calls and puts whose underlying security is the future contract, thirdly, it allows us to use real market perfectly synchronized prices, and fourthly, transaction costs can be considered. The paper presents an empirical test involving the German market that reveals some differences with regard to previous studies. Abstract. The paper provides a new method to replicate and price the quality options usually embedded in many future contracts. The replicating strategies may draw on both the future contract and its related calls and puts. They also yield the quality option theoretical price in perfect markets, as well as upper and lower bounds for its bid or ask prices if frictions are incorporated. With respect to previous literature, this new approach seems to reflect four contributions: Firstly, the analysis does not depend on any dynamic assumption concerning the TSIR behaviour, secondly, it incorporates the information contained in calls and puts whose underlying security is the future contract, thirdly, it allows us to use real market perfectly synchronized prices, and fourthly, transaction costs can be considered. The paper presents an empirical test involving the German market that reveals some differences with regard to previous studies. Keywords