Correlations in the bond-future market

We analyse the time series of overnight returns for the BUND and BTP future s exchanged at LIFFE (London). The overnight returns of both assets are map ped onto a one-dimensional symbolic-dynamics random walk: The 'bond walk'. During the considered period (October 1991-January 1994) the BUND-future ma rket opened earlier than the BTP-future one. The crosscorrelations between the two bond walks, as well as estimates of the conditional probability, sh ow that they are not independent; however each walk can be modelled by mean s of a trinomial probability distribution. Monte Carlo simulations cofirm t hat it is necessary to take into account the bivariate dependence in order to properly reproduce the statistical properties of the real-world data. Va rious investment strategies have been devised to exploit the "prior" inform ation obtained by the aforementioned analysis. (C) 1999 Elsevier Science B. V. All rights reserved.