Abstract

http://ssrn.com/abstract=1672982
 
 

References (98)



 
 

Citations (19)



 


 



Why Does the Treasury Issue TIPS? The TIPS-Treasury Bond Puzzle


Matthias Fleckenstein


University of California, Los Angeles (UCLA) - Anderson School of Management

Francis A. Longstaff


University of California, Los Angeles (UCLA) - Finance Area; National Bureau of Economic Research (NBER)

Hanno N. Lustig


Stanford Graduate School of Business; National Bureau of Economic Research (NBER)

September 6, 2010

Journal of Finance, Forthcoming

Abstract:     
We show that the price of a Treasury bond and an inflation-swapped 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 the persistence of arbitrage

Number of Pages in PDF File: 81

Keywords: Fixed Income, Arbitrage, TIPS

JEL Classification: G12


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Date posted: September 7, 2010 ; Last revised: August 24, 2012

Suggested Citation

Fleckenstein, Matthias and Longstaff, Francis A. and Lustig, Hanno N., Why Does the Treasury Issue TIPS? The TIPS-Treasury Bond Puzzle (September 6, 2010). Journal of Finance, Forthcoming. Available at SSRN: http://ssrn.com/abstract=1672982 or http://dx.doi.org/10.2139/ssrn.1672982

Contact Information

Matthias Fleckenstein
University of California, Los Angeles (UCLA) - Anderson School of Management ( email )
110 Westwood Plaza
Los Angeles, CA 90095-1481
United States
Francis A. Longstaff (Contact Author)
University of California, Los Angeles (UCLA) - Finance Area ( email )
Los Angeles, CA 90095-1481
United States
310-825-2218 (Phone)
310-206-5455 (Fax)
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Hanno N. Lustig
Stanford Graduate School of Business ( email )
Stanford GSB
655 Knight Way
Stanford, CA California 94305-6072
United States
3108716532 (Phone)

National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
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