Profitability of executing relative value (RV) yield curve arbitrage strategy

Abstract

This study investigates profitability of the butterfly strategy, which is commonly used by active bond fund managers to mitigate risk and to enhance portfolio returns. While the strategy's success is conditional on the accuracy of forecast shifts in the yield curve, it also has a defensive feature that may enable any losses incurred to be relatively small. I test out this strategy in the Korean Market and find that the cash and dollar duration-neutral butterfly on average, generates less profits compared to the regression weighted butterfly strategy.