A Theory of Small Maturity Effects and Data Realities of 7DTE Treasury Options across Tenors

59 Pages Posted: 25 Oct 2024

See all articles by Gurdip Bakshi

Gurdip Bakshi

Temple University-Fox School of Business

John Crosby

University of Maryland - Robert H. Smith School of Business

Xiaohui Gao

Temple University-Fox School of Business

Jorge Wolfgang Hansen

Aarhus University - Department of Economics and Business Economics; Aarhus University; Danish Finance Institute (DFI)

Date Written: September 17, 2024

Abstract

This study introduces data on weekly expiring (7DTE) Treasury options and presents two observations. First, the 7DTE risk-neutral distributions of the 30-year bond futures are right-shifted compared to their 10-year counterparts. Second, the return skewness for both tenors changes direction, with the 30 (10)-year exhibiting positive (negative) skewness on average. We propose a model with two Poisson processes and stochastic intensity rates as an explanation. The model accounts for correlated price jump distributions, differing in expected jump sizes between the tenors, for both down and up movements. The estimated 7DTE model supports the theoretical implications of the two empirical observations.

Suggested Citation

Bakshi, Gurdip S. and Crosby, John and Gao, Xiaohui and Hansen, Jorge Wolfgang, A Theory of Small Maturity Effects and Data Realities of 7DTE Treasury Options across Tenors (September 17, 2024). Available at SSRN: https://ssrn.com/abstract=4959006 or http://dx.doi.org/10.2139/ssrn.4959006

Gurdip S. Bakshi

Temple University-Fox School of Business ( email )

PA 19122
United States

John Crosby

University of Maryland - Robert H. Smith School of Business ( email )

College Park, MD 20742-1815
United States
+447979901892 (Phone)

HOME PAGE: http://www.john-crosby.co.uk/

Xiaohui Gao (Contact Author)

Temple University-Fox School of Business ( email )

PA 19122
United States

Jorge Wolfgang Hansen

Aarhus University - Department of Economics and Business Economics ( email )

Fuglesangs Allé 4
Aarhus V, 8210
Denmark

Aarhus University ( email )

Nordre Ringgade 1
DK-8000 Aarhus C, 8000
Denmark

Danish Finance Institute (DFI) ( email )

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