French Bond Market Mispricing Uncovered, Profits Explained by Interest Rate Changes
The article investigates mispricing in French Treasury inflation-linked bonds compared to nominal bonds. By creating hedged portfolios and analyzing interest rate risks, the researchers found profitable arbitrage opportunities. These profits were not explained by traditional risk factors, but by changes in the difference between forward nominal and real rates. The study also introduced a new pricing method based on forward rates to support these arbitrage strategies.