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Home | Events Archive | The Puzzle of Negative Average Returns to Call Options on Treasury Bond Futures
Seminar

The Puzzle of Negative Average Returns to Call Options on Treasury Bond Futures


  • Location
    Tinbergen Institute, room 1.01
    Amsterdam
  • Date and time

    March 27, 2019
    12:45 - 14:00

We formalize the notion of local time risk premium in the context of a theory in which the pricing kernel is a general diffusion process with spanned and unspanned components. We derive results on the expected excess return of options on bond futures. These results are organized around our new empirical finding that the average returns of out-of-the-money puts and calls, on Treasury bond futures, are negative. Our theoretical reconciliation warrants a negative local time risk premium, and our treatment considers models with market incompleteness and sources of volatility uncertainty.