Research On Arbitrage Strategy Of Treasury Bond Futures

One of the main operating strategy for treasury bond futures is the arbitrage strategy, which can be divided into two aspects: the cross market arbitrage and the cross term arbitrage. The paper deduced cash flow model for the cross market arbitrage, the equilibrium price difference model for the cross term arbitrage and statistical arbitrage method. Then the paper carry on an empirical analysis to the effect of the models above, based on data from Sep 6, 2013.On the cross market aspect, one arbitrage strategy is cash flow model,which set the boundary of no-arbitrage interval on the balance point of cash flow: borrow money to buy ETF and short sell treasury bond futures(or the opposite), then close out on the delivery date.The model belongs to mean reversion model essentially. The other strategy is statistical arbitrage strategy,which uses moving average or GARCH model to describe the time series of basis.It constructs Bollinger Bands on last K-days moving average, standard deviation or GARCH model forecast and belongs to trend following model. Empirical results shows that the cash flow model is better than statitical arbitrage method on the one-time revenue, meaning more profitability. But its mean reverse property needs huge cash deposit to continuously open position, which is difficult in the real world. Besides, the cash flow model is more sensitive to the parameters setting, so it may lose its profitbility on out-of-sample data.Statistical arbitrage strategy is relatively more stable, especially on the directon of arbitrage, less continuously opening position and less cash deposit, but its profit is also less.On the the cross term arbitrage aspect, one arbitrage strategy is the equilibrium price difference model, which seizes arbitrage opportunities when the deviation of cross term price difference and the theoretical one beyond the trade cost. Similar to the cash flow model, equilibrium price difference model is also a mean reverse model. The main parameter is the equilibrium price difference, setted through subjective judgement. The other model is statictical arbitrage, which belongs to trend following model. The empirical result shows that equilibrium price difference model's profit is much large than the statistical arbitrage on average, but the sttistical arbitage has advantages on less continuously opening position and less cash deposit. On the Stability aspect, both of the models have their appropriate situations: the equilibrium price difference model fits the strong teandency market well, while the statitical arbitrage strategy needs more stable market environment.The improvements of the models above lie in three aspects: expand the no-arbitrage interval, make the open position more difficult and set the maximum position limit. We design our strategy basing on cash flow model and equilibrium price difference model and refer to the idea of statistical arbitrage. Only when the continuous days that basis lies outside the no-arbitrage interval reaches five can we open position. The empirical result shows the average one time profit of cross market arbitrage is between 2 thousand RMB and 4 thousand RMB, and the average one time profit of cross term arbitrage is between 750 RMB and 800 RMB.The arbitrage strategy of treasury bond futures can get some profit under the cash limit. But due to the instability, it's difficult to gain stable profit through single arbitrage strategy. So they should be positioned as enhanced strategies of fix income.