Callable U.S. Treasury Bonds: Optimal Calls, Anomalies, and Implied Volatilities

Posted: 21 May 1998

See all articles by Ehud I. Ronn

Ehud I. Ronn

University of Texas at Austin - Department of Finance

Robert R. Bliss

Wake Forest University - Schools of Business

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Abstract

Using implied volatility analysis, this article addresses two important issues concerning callable bonds: negative option value anomalies and the optimal call decision rule. In examining apparent negative option values embedded in callable U.S. Treasury bonds, we significantly extend the sample periods and breadths covered by previous researchers and resolve the inconsistencies in their results. We show that the frequency of negative option values is time-varying and related to away-from-the-moneyness. We then develop the option-theoretic optimal policy for calling bonds by introducing the concept of "threshold volatility." Using the concept we determine that most past Treasury call decisions were optimal.

JEL Classification: G12

Suggested Citation

Ronn, Ehud I. and Bliss, Robert R., Callable U.S. Treasury Bonds: Optimal Calls, Anomalies, and Implied Volatilities. Available at SSRN: https://ssrn.com/abstract=90891

Ehud I. Ronn

University of Texas at Austin - Department of Finance ( email )

Graduate School of Business
Austin, TX 78712
United States
512-471-5853 (Phone)
512-471-5073 (Fax)

Robert R. Bliss (Contact Author)

Wake Forest University - Schools of Business ( email )

P.O. Box 7659
Winston-Salem, NC 27109-7285
United States

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