Skip to main content

Please enter a keyword and click the arrow to search the site

Limits to arbitrage and mispricing in TIPS



Publishing details

Social Sciences Research Network

Authors / Editors

Bretscher L

Publication Year



This paper examines limits to arbitrage and mispricing in Treasury protected securities (TIPS). To this end, I construct two different measures of disparity in bond prices from the smooth yield curve. I find that deviations in prices are highly correlated for different maturities and also between nominal Treasury bonds and TIPS. This suggests that arbitrage capital is efficiently allocated across markets and also along the yield curve. I then study the relative mispricing of nominal bonds and TIPS. While flight-to-liquidity explains well the mispricing for nominal bonds it does not for TIPS. In fact, TIPS mispricing is driven by short-term Treasury bond liquidity and the slope of the term structure of expected inflation. Moreover, TIPS mispricing predicts short-term excess returns of TIPS during the crises. This findings can be rationalized with investors who opt for more liquid nominal bonds whenever the short-term expected inflation is very low, i.e. short-term nominal bonds and short-term TIPS are close to perfect substitutes


TIPS, Mispricing; Limits to Arbitrage; Flight-to-Liquidity


Social Sciences Research Network

Available on ECCH


Select up to 4 programmes to compare

Select one more to compare
subscribe_image_desktop 5949B9BFE33243D782D1C7A17E3345D0

Sign up to receive our latest news and business thinking direct to your inbox


Sign up to receive our latest course information and business thinking

Leave your details above if you would like to receive emails containing the latest thought leadership, invitations to events and news about courses that could enhance your career. If you would prefer not to receive our emails, you can still access the case study by clicking the button below. You can opt-out of receiving our emails at any time by visiting: or by unsubscribing through the link provided in our emails. View our Privacy Policy for more information on your rights.