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

Abstract

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. The results show that there is no systematic mis-pricing between these two options, but temporary arbitrage opportunities perceptible to the average informed trader are possible.