The Long-run Relationship among Index-linked Bonds and Conventional Bonds
AbstractThis paper investigates the existence of arbitrage between index linked bonds and conventional bonds. The long-run equilibrium relationship among two French bonds yields (The OAT yields and OATi) is also studied empirically. In practice, the Johansen methodology is applied to estimate different VAR-based cointegration tests. The presence of a structural break due to the subprime crisis is discussed as well. Two main results are reached: First, the cointegration test indicates the existence of a long run relationship between the OAT and OATi return, and then the co-movement of the latter is confirmed, a result which is believed to be important to understand the bond market¡¯s mechanism. Second, the structural break test shows the presence of structural change in the relation between the two types of bonds. This structural break is due to an increase of volatility in the OAT and OATi returns in the subprime crisis period.
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Volume (Year): 3 (2013)
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Find related papers by JEL classification:
- C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models &bull Diffusion Processes
- C8 - Mathematical and Quantitative Methods - - Data Collection and Data Estimation Methodology; Computer Programs
- E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
- G1 - Financial Economics - - General Financial Markets
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