Relative pricing of French Treasury inflation-linked and nominal bonds: an empirical approach using arbitrage strategies
Béatrice Séverac () and
José S. Fonseca ()
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Béatrice Séverac: Université Paris Nanterre, UFR SEGMI, Bâtiment Maurice Allais
José S. Fonseca: Faculty of Economics, University of Coimbra
Portuguese Economic Journal, 2021, vol. 20, issue 3, No 1, 273-295
Abstract This paper investigates whether arbitrage opportunities exist between inflation-linked bonds and nominal bonds on the French Treasury market. Following arbitrage theory, we apply the risk hedging concept: we set up self-financing portfolios hedged against risks through durations of different orders. Perfectly hedged portfolios are those with a zero initial and a zero final value. The results show arbitrage gains when the first three duration orders are implemented, but they are not significantly different from zero when a fourth-order duration is added. Furthermore, a regression of arbitrage gains on the illiquidity measure of nominal and index Treasury bonds provides evidence that the illiquidity of inflation-linked bonds significantly explains arbitrage gains, whereas the illiquidity measure of nominal bonds does not.
Keywords: Arbitrage; Duration; Inflation-linked bonds; Real interest rates; Inflation risk (search for similar items in EconPapers)
JEL-codes: E43 G01 G12 (search for similar items in EconPapers)
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