Data and the Global Corporate Bond Market

Team: Jacob Epstein, Emre Kiziltug, Alexander Rubin | Project Lead: Emma Rasiel | Project Manager: Hang Su

Introduction Visualization Analysis

Problem Statement:
Are there relative value opportunities in global corporate bond markets?
We examined 25 thousand corporate bonds over 10 years in order
to identify bond mispricings and determine the environments
where these mispricings are more common.
Goals:
1. Identify corporate bond pairs that are arbitrage candidates
2. Evaluate viability of identified candidates
3. Analyze characteristics of identified bonds
Definitions:
How to Read These Visualizations: Analysis of Bond Properties:
○ Top Graph: OAS of 2 bonds over time ○ Compare identified bonds to baseline of all other bonds
○ Bottom Graph: OAS differences over time ○ Characteristics of identified bonds:
○ Middle Red Line: Median of OAS differences ○ More outstanding shares
○ Upper / Lower Red Line: Boundaries of a 50 basis point duration-adjusted oas gap ○ More likely to be issued in USD, EUR, CAD*
from the median ○ Commonly traded maturities (5, 10 , 30 year) overrepresented
○ Vertical White Lines: Graph crosses boundaries (arbitrage opportunities) ○ Higher quality
○ More likely to be issued by financial institutions
○ Characteristics of identified bond pairs:
○ Same currency (93%)
○ High convergence rates – 1.24 days per month outside of
bounds
○ All differences are statistically significant at 0.01 alpha level
Actionable

*In descending order. Bonds issued in JPY not considered due to errors in data
○ Corporate Bond: Debt issued by a company to raise money
○ Arbitrage: The simultaneous buying and selling of nearly Graphic Analysis of Characteristics:
identical assets with differing prices to make riskless returns
○ Yield: Rate of return on a bond investment Maturities Peak at 5, 10, 30 years More Outstanding for Identified Bonds
○ Inversely correlated with price
○ Option-Adjusted Spread (OAS): Adjusted measure of yield
○ Duration: Price sensitivity to changing interest rates

Methods
Process:
Not Actionable

○ Iterate through pairs of bonds issued by same company, filter to Higher Quality Bonds More Likely to be Identified
ensure sufficient similarity
○ Same issuer, maturity and quality; high correlation
Key
○ Check for opportunities – 50 basis point (0.5%) difference in
duration- adjusted OAS
○ Visualize similar bonds over time
N
○ Classify with K-Nearest Neighbor supervised learning algorithm
20077
○ Compare common bond properties of identified bonds vs. 2090
baseline
Classification
Visualization of Filtering Technique:
K-Nearest Neighbor Classification: Conclusions
○ Need to identify the actionable cases from the 5000 identified bond pairs
○ Trained and validated on 300 manually classified observations Selected Conclusions from Analysis:
○ Chose k = 18 (square root of training set size) ○ Opportunities for short-term arbitrage exist regularly during
○ Engineered eight features non-crisis times
○ Proportion of points outside bounds, consecutive points crossing lower bound, upper
○ Most common among bonds that demonstrate the above
bound and median, same currency, correlation, volatility, squared difference from
properties, which indicates opportunities are most common in
median
liquid markets
○ Used min-max normalization to scale all features between 0 and 1
○ Identified 2090 good arbitrage cases ○ A viable trading strategy based on corporate bond arbitrage is
○ Evaluated with 10-fold cross validation possible, and is aided by the high liquidity of the identified bonds
○ Precision: 81.6%
○ Recall: 79.5%