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Relative pricing of French Treasury inflation-linked and nominal bonds : an empirical approach using arbitrage strategies
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Orientador(es)
Resumo(s)
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
Descrição
Palavras-chave
Arbitrage Duration Inflation-linked bonds Real interest rates Inflation risk
Contexto Educativo
Citação
Séverac, Béatrice de e José S. da Fonseca (2021). "Relative pricing of French Treasury inflation-linked and nominal bonds : an empirical approach using arbitrage strategies". Portuguese Economic Journal, 20(3):273-295
Editora
Springer