Co-movement of Index linked bonds and conventional bonds in France: Subprime crisis and Structural Break, 2003-01, 2012-04

This paper investigates the existence of arbitrage between index linked bonds and conventional ones. Then in a second part we move to study empirically the long-run equilibrium relationship among two French bonds yields (The OAT yields and OATi ). In practice we estimated different VAR-based cointegration tests using the methodology developed in Johansen (1991, 1995). We also move to discuss the presence of a structural break due to the subprime crisis. So, we can reach two main results: First, the cointegration test indicates the existence of a long run relationship between the OAT and OATi return, and then the co-movement of this latter is confirmed, a result which I believe 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.