José Orlando de Araújo Trevisan

The motivation of this research was the public assets market in Brazil, Zero Cupon Bond (Letras do Tesouro Nacional - LTN). The Central Bank of Brazil controls this market, which is composed by institutional investors. Our mains objectiveis to investigate the existence of arbitrage in this asset market. We start from the identification of the market and its most important asset (LTN). In the first chapter we stressed the behavior of the asset LTN during the period of 1995, February and 1998, May. Therefore, we presented the main theories concerning arbitrage in the asset markets, such as: Arbitrage Price Theory (APT), West (1992) and Hull (1996)'s models of arbitrage, and the comparative studies of Britto & Sosin (1984). In accordance with these models we formulated an analysis to prove the existence of arbitrage in the market of LTN. The empirical methodology to prove the existence of arbitrage in the market of LTN. The empirical methodology we chose was the ARCH (AutoRegressive Conditional to Heterokedasticity). A reason is that if we prove that the errors structure are not homokedastics, then there are different pay-offs to the same asset in the same market. This is one concept of arbitrage that we adopted in this research. Moreover, we applied White and Engle tests to prove the heterokedastic structure in two differents analysis. One using the most important auctions during the month, the first four ones. The other using the complete series all together. Furthermore, we conclude that there is a heterokedastic process in the error structure of LTN assets. That is, the possibility of arbitrage in the market of LTN asset exists. Yet, the results showed that the second lag of auctions is the most important one in the determination of the agents behavior in this market. Notwihstanding, acessing information about a secundary market would allow us to measure the precise magnitude of the arbitrage in the asset market of LTN in the Brazilian economy.