Strategies · Library · Fixed income
§5.8Pairs and relative value
Regression-weighted butterfly
A butterfly where the wing sizes use a historical ratio of how much the body-to-short-wing spread moves compared with the long-wing spread, because short rates tend to be more volatile.
- Asset class
- Fixed income
- Held for
- Weeks
- Data
- Needs data ARCANE lacks
- Symphony
- Cannot be built as a symphony
The rule
- Signal
- Regression slope of spread changes plus duration weights
- Entry and exit
- Size wings from the slope; hold and close on curvature move.
- Sizing
- Solved from duration and slope conditions
How it fails
- Unstable regression
- Short leg
- Curve regime changes
Data it needs
- inputs ARCANE does not hold
Needs shorting and bond-level history.
How ARCANE uses it
None yet: ARCANE does not hold the data this trades on.
Requires a short leg and a regression.
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, p. 73 of the SSRN version. Described in our words. Pairs and relative value is ARCANE’s filing, not the book’s.