A Reexamination of Option Values Implicit in Callable Treasury Bonds

JOURNAL OF FINANCIAL ECONOMICS, 1995

Posted: 5 Dec 1994

See all articles by Bradford D. Jordan

Bradford D. Jordan

University of Florida; University of Florida - Department of Finance, Insurance and Real Estate

Susan D. Jordan

University of Kentucky - Finance

Randy D. Jorgensen

Creighton University

Abstract

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

Jordan, Bradford D. and Jordan, Susan D. and Jorgensen, Randy D., A Reexamination of Option Values Implicit in Callable Treasury Bonds. JOURNAL OF FINANCIAL ECONOMICS, 1995, Available at SSRN: https://ssrn.com/abstract=5690

Bradford D. Jordan (Contact Author)

University of Florida ( email )

Gainesville, FL 32611
United States

University of Florida - Department of Finance, Insurance and Real Estate ( email )

P.O. Box 117168
Gainesville, FL 32611
United States

Susan D. Jordan

University of Kentucky - Finance ( email )

Gatton College of Business & Economics
University of Kentucky
Lexington, KY 40506-0034
United States
859-257-1626 (Phone)

Randy D. Jorgensen

Creighton University ( email )

2500 California Plaza
College of Business
Omaha, NE 68178
United States

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