Work

The TIPS‐Treasury Bond Puzzle

Year: 2013

Type: article

Abstract: ABSTRACT We show that the price of a Treasury bond and an inflation‐swapped Treasury Inflation‐Protected Securities (TIPS) issue exactly replicating the cash flows of the Treasury bond can differ by more than $20 per $100 notional. Treasury bonds are almost always overvalued relative to TIPS. Total TIPS‐Treasury mispricing has exceeded $56 billion, representing nearly 8% of the total amount of TIPS outstanding. We find direct evidence that the mispricing narrows as additional capital flows into the markets. This provides strong support for the slow‐moving‐capital explanation of arbitrage persistence.

Source: The Journal of Finance

DOI: 10.1111/jofi.12032

Authors: MATTHIAS FLECKENSTEIN, FRANCIS A. LONGSTAFF, HANNO LUSTIG

Institutions: University of California, Los Angeles, Massachusetts Institute of Technology, Federal Reserve Bank of San Francisco, Federal Reserve Bank of New York, National Bureau of Economic Research

Language: English

Topic: Financial Markets and Investment Strategies

Subfield: Finance

Field: Economics, Econometrics and Finance

Domain: Social Sciences

Open Access status: bronze

OpenAlex ID: W2108103725

FWCI: 26.4

Cites: 93

Cited by: 287

Related to: 10