Bayesian Arbitrage Threshold Analysis

Catherine S. Forbes, Guyonne R. J. Kalb and Paul Kofman

No 267925, Department of Econometrics and Business Statistics Working Papers from Monash University, Department of Econometrics and Business Statistics

Abstract: A Bayesian estimation procedure is developed for estimating multiple regime (multiple threshold) vector autoregressive models appropriate for deviations from financial arbitrage relationships. This approach has clear advantages over classical stepwise threshold autoregressive analysis. Whereas classical procedures first have to identify thresholds and then perform piecewise autoregressions, we simultaneously estimate threshold and autoregression parameters. To illustrate the Bayesian procedure, we estimate a no-arbitrage band within which index futures arbitrage is not profitable despite (persistent) deviations from parity.

Keywords: Research and Development/Tech Change/Emerging Technologies; Research Methods/Statistical Methods (search for similar items in EconPapers)
Pages: 27
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Persistent link: https://EconPapers.repec.org/RePEc:ags:monebs:267925

DOI: 10.22004/ag.econ.267925

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