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Options on bond futures: Isolating the risk premium

✍ Scribed by Robert G. Tompkins

Publisher: John Wiley and Sons
Year: 2002
Tongue: English
Weight: 509 KB
Volume: 23
Category: Article
ISSN: 0270-7314
DOI: 10.1002/fut.10058

No coin nor oath required. For personal study only.

✦ Synopsis

Abstract

The introduction of unspanned sources of risk (and frictions) implies that option prices include a
risk premium. Prima facie evidence of the existence of risk premia in option prices is contained in the implied
volatility smile patterns reported in the literature. This article isolates the risk premium (defined as the
simple difference between estimated and observed option prices) on options on U.K. Gilts, German Bunds, and
U.S. Treasury bond futures using models that include price jumps and stochastic volatility. This study finds that
single and multi‐factor stochastic volatility models with jumps may explain the empirical regularities
observed in bond futures. © 2003 Wiley Periodicals, Inc. Jrl Fut Mark 23:169–215, 2003

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