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Hi,Im starting on an interest rate products trading desk and have been told that im to spend the first 6 months or so trading government bonds together with vanilla swaps before moving on to more exotic products. Ive been asked to do a little homework on models currently being used in the industry to capture arbitrage and wondered if anyone would like to comment on anything they are currently using for IR products or have heard about? With a strong background in econometrics, my first port of call would be to build something that captures mean-reversion trades with the mean driven by economic fundamentals (i.e. cointegrating models of the yield curve and short rate), however, im sure there are other technologies that are more fashionable at the moment? I did a bit of reading on high-frequency finance a while back and remember that fractal finance and various data filtering methods have become popular drivers of momentum trading systems, are these suitable for trading IR products?Any ideas or comments appreciated,Regards,Ren.

There are a variety of them. I'm looking at BGM and Vasicek right now. Vasicek is mean reverting.

Excuse my ignorance,Vasicek and HJM may be great for modelling the short rate and pricing IR derivs , but how to trade off this? Rgds,Ren.

Hi RenikusI'm giving to you just these two hints:http://faculty.chicagogsb.edu/john.coch ... 4-1.pdfThe first involves regressions and ols. The second is implemented with the use of Unscented Kalman filter to estimate the term structure.Chiara

hello renikus,If you have a repo division near you, what about analysing Cash&Carry or Reverse C&C opportunities with notional or Short rate futures?

Could you elaborate on this? This sounds interesting...Ren.

most profitable interest rate strategy is to make a good friend on the dealer side of rates and have him tell you when FNMA is in the market and then pile on a bunch of the trade for yourself...

check this webpage:http://www.javaquant.net/finalgo.html

I just finished browsing the book "An Arbitrage Guide to Financial Markets" by Robert Dubil and in it he listed several "common" IR arb strategies used on trading desks (some of which are briefly outlined below). I just wonder how common they really are as "common" usually means little or no arb opportunity left.1) Zero coupon stripping & coupon replication - self explanatory.2) Duration matching trades - arbitraging spot bond markets through dynamic strategies of duration matching.3) Corporate bond trades - inventory trading due to customer flows and spread arbitrage.There aren't too much complicated math behind these strategies though, not sure if they fit what you are looking for.