Strategies · Library · Fixed income
§5.8.1Pairs and relative value
Maturity-weighted butterfly
A variant of §5.8 Regression-weighted butterfly
Same as the regression-weighted butterfly, but the spread ratio comes from the gaps between the three maturities rather than a regression.
- Asset class
- Fixed income
- Held for
- Weeks
- Data
- Needs data ARCANE lacks
- Symphony
- Cannot be built as a symphony
The rule
- Signal
- Maturity gaps as the sizing factor
- Entry and exit
- Size from maturities; hold and close on curvature move.
- Sizing
- Wing ratio set by relative maturity gaps
How it fails
- Rule is crude
- Short leg
- Curvature risk
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.
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, §5.8.1, p. 74 of the SSRN version. Described in our words. Pairs and relative value is ARCANE’s filing, not the book’s.