A Reexamination of Option Values Implicit in Callable Treasury Bonds
JOURNAL OF FINANCIAL ECONOMICS, 1995
Posted: 5 Dec 1994
Longstaff (1992) and Edleson, Fehr, and Mason (1993) examine option values implicit in callable Treasury bonds and report a significant puzzle: implied option values are frequently negative. Using an alternative approach, we reexamine this issue and find implied option values are generally positive, and, in contrast to previous studies, instances of option values that are negative enough to overcome the bid-ask spread are relatively rare. We explain the findings in other studies by showing that the methodology used can potentially lead to the appearance of a negative option value when the true value is positive.
JEL Classification: G12, G13
Suggested Citation: Suggested Citation