IDEAS home Printed from https://ideas.repec.org/a/ucp/jnlbus/v65y1992i4p571-92.html
   My bibliography  Save this article

Are Negative Option Prices Possible? The Callable U.S. Treasury-Bond Puzzle

Author

Listed:
  • Longstaff, Francis A

Abstract

Market prices for callable Treasury bonds often imply negative values for the implicit call option. The author considers a variety of possible explanations for these negative values including the Treasury's track record in calling bonds optimally, tax-related effects, tax-timing options, and bond liquidity. None of these factors accounts for the negative values. Although the costs of short selling may explain why these apparent arbitrage opportunities persist over time, why these implicit call values become negative in the first place remains a puzzle. Copyright 1992 by University of Chicago Press.

Suggested Citation

  • Longstaff, Francis A, 1992. "Are Negative Option Prices Possible? The Callable U.S. Treasury-Bond Puzzle," The Journal of Business, University of Chicago Press, vol. 65(4), pages 571-592, October.
  • Handle: RePEc:ucp:jnlbus:v:65:y:1992:i:4:p:571-92
    as

    Download full text from publisher

    File URL: http://dx.doi.org/10.1086/296586
    File Function: full text
    Download Restriction: Access to full text is restricted to JSTOR subscribers. See http://www.jstor.org for details.

    As the access to this document is restricted, you may want to search for a different version of it.

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Xie, Yan Alice & Liu, Sheen & Wu, Chunchi & Anderson, Bing, 2009. "The effects of default and call risk on bond duration," Journal of Banking & Finance, Elsevier, vol. 33(9), pages 1700-1708, September.
    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.
    3. Kahl, Matthias & Liu, Jun & Longstaff, Francis A., 2003. "Paper millionaires: how valuable is stock to a stockholder who is restricted from selling it?," Journal of Financial Economics, Elsevier, vol. 67(3), pages 385-410, March.
    4. Gagnon, Louis & Andrew Karolyi, G., 2010. "Multi-market trading and arbitrage," Journal of Financial Economics, Elsevier, vol. 97(1), pages 53-80, July.
    5. Flandreau, Marc & Oosterlinck, Kim, 2012. "Was the emergence of the international gold standard expected? Evidence from Indian Government securities," Journal of Monetary Economics, Elsevier, vol. 59(7), pages 649-669.
    6. Jarrow, Robert & Li, Haitao & Liu, Sheen & Wu, Chunchi, 2010. "Reduced-form valuation of callable corporate bonds: Theory and evidence," Journal of Financial Economics, Elsevier, vol. 95(2), pages 227-248, February.
    7. Jason Seligman, 2012. "Support of State and Local Finance under Persistent Federal Deficits," International Advances in Economic Research, Springer;International Atlantic Economic Society, vol. 18(4), pages 383-395, November.
    8. Jordan, Bradford D. & Jordan, Susan D. & Jorgensen, Randy D., 1995. "A reexamination of option values implicit in callable Treasury bonds," Journal of Financial Economics, Elsevier, vol. 38(2), pages 141-162, June.
    9. repec:kap:iaecre:v:18:y:2012:i:4:p:383-395 is not listed on IDEAS
    10. Ioffe, Ioulia D., 2002. "Arbitrage bounds in markets with noisy prices and the puzzle of negative option prices implicit in bonds," Journal of Banking & Finance, Elsevier, vol. 26(6), pages 1199-1228, June.
    11. Longstaff, Francis A., 2001. "The Flight-to-Liquidity Premium in U.S. Treasury Bond Prices," University of California at Los Angeles, Anderson Graduate School of Management qt7dc0t95b, Anderson Graduate School of Management, UCLA.
    12. Jordan, Bradford D. & Kuipers, David R., 1997. "Negative option values are possible: The impact of Treasury bond futures on the cash U.S. Treasury market," Journal of Financial Economics, Elsevier, vol. 46(1), pages 67-102, October.
    13. Lim, Terence & Lo, Andrew W. & Merton, Robert C. & Scholes, Myron S., 2006. "The Derivatives Sourcebook," Foundations and Trends(R) in Finance, now publishers, vol. 1(5–6), pages 365-572, April.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ucp:jnlbus:v:65:y:1992:i:4:p:571-92. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Journals Division). General contact details of provider: http://www.journals.uchicago.edu/JB/ .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.