What drives the TIPS–Treasury bond mispricing?

Jungkyu Ahn and Yongkil Ahn

Journal of Empirical Finance, 2023, vol. 74, issue C

Abstract: Inflation-swapped Treasury Inflation-Protected Securities (TIPS) are usually undervalued compared to cash flow-matched Treasury bonds. From 2005 to 2022, TIPS discounts are persistent, averaging approximately 3.18 % of the face value, with a peak of 16.10 %. We elucidate the factors associated with this persistent mispricing and the extent of this association. The results from feature selection techniques and the variable importance-in-projection method reveal that marking-to-market concerns and intermediation frictions are key to understanding the underpricing of TIPS relative to comparable nominal Treasury securities. We conclude that when strategic concerns overwhelm fundamental analysis, asset prices could deviate from fundamental values over a prolonged period.

Keywords: TIPS; Asset swaps; Strategic concerns; Marking-to-market; Intermediation frictions (search for similar items in EconPapers)
JEL-codes: C58 G12 (search for similar items in EconPapers)
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:eee:empfin:v:74:y:2023:i:c:s0927539823001056

DOI: 10.1016/j.jempfin.2023.101438

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