Inflation-Linked and Nominal Government Bonds Puzzle - New Evidence from the Israeli Market

38 Pages Posted: 8 Dec 2017 Last revised: 28 Dec 2017

Date Written: December 2017

Abstract

Flekenstein, Longstaff and Lustig (2014) find mispricing between Treasury bonds and Treasury Inflation-Protected Securities (TIPS) in the United States, suggesting that Treasury bonds are expensive relative to TIPS. I examine the existence of a mispricing in the Israeli government bond market, a market with different characteristics. I find that in Israel the mispricing is in the opposite direction and it is positively affected by the last inflation surprise known at the time the arbitrage strategy is executed. Given these results, it appears that the mispricing opportunity documented by Flekenstein, Longstaff and Lustig (2014) does not work in a single direction.

Keywords: Government Bonds; Inflation; International Financial Markets; Market efficiency

JEL Classification: E3, G12, G14, G15, G18, H63

Suggested Citation

Levy, Erez and Levy, Erez, Inflation-Linked and Nominal Government Bonds Puzzle - New Evidence from the Israeli Market (December 2017). Available at SSRN: https://ssrn.com/abstract=3082034 or http://dx.doi.org/10.2139/ssrn.3082034

Erez Levy (Contact Author)

Tel Aviv University, Coller School of Management ( email )

Tel Aviv
Israel

Northwestern University - Kellogg School of Management ( email )

2211 campus drive
Evanston, IL 60208
United States

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