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The Long-run Relationship among Index-linked Bonds and Conventional Bonds

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  • Noureddine Benlagha

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    (IHEC Sfax, University of Sfax, Tunisia)

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    Abstract

    This 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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    Bibliographic Info

    Article provided by Better Advances Press, Canada in its journal Review of Economics & Finance.

    Volume (Year): 3 (2013)
    Issue (Month): (February)
    Pages: 15-24

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    Handle: RePEc:bap:journl:130102

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    Related research

    Keywords: Index linked bonds; Cointegration; Structural break; Subprime crisis;

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    1. Denis Kwiatkowski & Peter C.B. Phillips & Peter Schmidt, 1991. "Testing the Null Hypothesis of Stationarity Against the Alternative of a Unit Root: How Sure Are We That Economic Time Series Have a Unit Root?," Cowles Foundation Discussion Papers, Cowles Foundation for Research in Economics, Yale University 979, Cowles Foundation for Research in Economics, Yale University.
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