monash_6928.pdf (707.6 kB)
Download file

Bayesian Arbitrage Threshold Analysis

Download (707.6 kB)
journal contribution
posted on 08.06.2017, 03:27 by Forbes, Catherine S., Kalb, Guyonne R. J., Kofman, Paul
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.


Year of first publication



Department of Econometrics and Business Statistics.