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Relative pricing of French Treasury inflation-linked and nominal bonds: an empirical approach using arbitrage strategies

Author

Listed:
  • Béatrice Séverac

    (Université Paris Nanterre, UFR SEGMI, Bâtiment Maurice Allais)

  • José S. Fonseca

    (Faculty of Economics, University of Coimbra)

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.

Suggested Citation

  • Béatrice Séverac & José S. Fonseca, 2021. "Relative pricing of French Treasury inflation-linked and nominal bonds: an empirical approach using arbitrage strategies," Portuguese Economic Journal, Springer;Instituto Superior de Economia e Gestao, vol. 20(3), pages 273-295, September.
    • Handle: RePEc:spr:portec:v:20:y:2021:i:3:d:10.1007_s10258-020-00185-1
    DOI: 10.1007/s10258-020-00185-1
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    References listed on IDEAS

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    More about this item

    Keywords

    Arbitrage; Duration; Inflation-linked bonds; Real interest rates; Inflation risk;
    All these keywords.

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • G01 - Financial Economics - - General - - - Financial Crises
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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