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

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  • Bliss, Robert R
  • Ronn, Ehud I

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, the authors significantly extend the sample periods and breadths covered by previous researchers and resolve the inconsistencies in their results. They show that the frequency of negative option values is time-varying and related to away-from-the-moneyness. The authors then develop the option-theoretic optimal policy for calling bonds by introducing the concept of 'threshold volatility.' Using the concept, the authors determine that most past Treasury call decisions were optimal. Copyright 1998 by University of Chicago Press.

Suggested Citation

  • Bliss, Robert R & Ronn, Ehud I, 1998. "Callable U.S. Treasury Bonds: Optimal Calls, Anomalies, and Implied Volatilities," The Journal of Business, University of Chicago Press, vol. 71(2), pages 211-252, April.
    • Handle: RePEc:ucp:jnlbus:v:71:y:1998:i:2:p:211-52
    DOI: 10.1086/209743
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    Cited by:

    1. Barone-Adesi, Giovanni & Bermudez, Ana & Hatgioannides, John, 2003. "Two-factor convertible bonds valuation using the method of characteristics/finite elements," Journal of Economic Dynamics and Control, Elsevier, vol. 27(10), pages 1801-1831, August.
    2. King, Tao-Hsien Dolly, 2007. "Are embedded calls valuable? Evidence from agency bonds," Journal of Banking & Finance, Elsevier, vol. 31(1), pages 57-79, January.

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