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Options on bond futures: Isolating the risk premium
Author(s) -
Tompkins Robert G.
Publication year - 2003
Publication title -
journal of futures markets
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.88
H-Index - 55
eISSN - 1096-9934
pISSN - 0270-7314
DOI - 10.1002/fut.10058
Subject(s) - futures contract , treasury , economics , bond , risk premium , volatility (finance) , stochastic volatility , financial economics , econometrics , implied volatility , prima facie , finance , philosophy , archaeology , epistemology , history
The introduction of unspanned sources of risk (and frictions) implies that option prices include arisk premium. Prima facie evidence of the existence of risk premia in option prices is contained in the impliedvolatility smile patterns reported in the literature. This article isolates the risk premium (defined as thesimple difference between estimated and observed option prices) on options on U.K. Gilts, German Bunds, andU.S. Treasury bond futures using models that include price jumps and stochastic volatility. This study finds thatsingle and multi‐factor stochastic volatility models with jumps may explain the empirical regularitiesobserved in bond futures. © 2003 Wiley Periodicals, Inc. Jrl Fut Mark 23:169–215, 2003