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Identifying Statistical Arbitrage in Interest Rate Markets: A Genetic Algorithm Approach

In this paper a multidimensional term structure model is used to find statistical arbitrage opportunities in the interest rates derivatives market. The implied volatility of the model is calibrated by using a genetic algorithm optimization method. Two different options over the same underlying interest rate asset are tested, using data from a weak efficient economy market - Brazilian derivatives market. The results show that there is no systematic mispricing between these two options, but temporary arbitrage opportunities perceptible to the average informed trader are possible.

JEL classification: G13, C51, C52, C63

Keywords: Interest Rates Derivatives, Financial Economics, Arbitrage, Swaption-Cap Puzzle

Published on 6th July 2020
Authors Dr Juan Arismendi Zambrano
Series Reference ICM-2020-05