Detecting arbitrage oppotunities focused on forces of demand and supply in bond markets

Abstract

Bond price is affected by main two factors; fundamentals,and forces of demand and supply. The latter impact on prices has a tendency to extinguish in less time compared to the former one. This papers provides an investment strategy focused on forces of demand and supply. We analyze a time series of bonds prices using Principal Component Regression and Partial Least Squares Regression to detect the forces of demand and supply that skews the equilibrium price and generates arbitrage oppotunities.