The Puzzle of Negative Average Returns to Call Options on Treasury Bond Futures
Speaker(s)Gurdip Bakshi (Temple University, United States)
LocationTinbergen Institute, room 1.01
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.