Strategies · Library · Fixed income
§5.6Pairs and relative value
Dollar-duration-neutral butterfly
Combine a long position in a short and a long maturity with a short position in a middle maturity, sized so cost is zero and the rate sensitivity cancels. It profits from a change in the shape of the curve.
- Asset class
- Fixed income
- Held for
- Weeks
- Data
- Needs data ARCANE lacks
- Symphony
- Cannot be built as a symphony
The rule
- Signal
- Three maturities with durations; sizes solve zero cost and zero dollar duration
- Entry and exit
- Open sized legs, hold, close when curvature moves.
- Sizing
- Solved from two equations
How it fails
- Slope and curvature risk
- Short leg
- Model drift
Data it needs
- inputs ARCANE does not hold
Needs shorting and bond-level data.
How ARCANE uses it
None yet: ARCANE does not hold the data this trades on.
Requires a short leg and exact duration sizing.
Filed under the pairs and statistical arbitrage card
Find two securities whose prices moved together for a year. When the gap between them opens past two standard deviations, buy the laggard and sell the leader.
A paper plan from this card holds 5 to 126 days, stops at 1.5× the expected move and uses at most 50% of your risk budget. The card
Source: Kakushadze and Serur (2018), 151 Trading Strategies, §5.6, p. 72 of the SSRN version. Described in our words. Pairs and relative value is ARCANE’s filing, not the book’s.