Government Bond Futures Research Articles

Option-Implied Asymmetries in Bond Market Expectations Around Monetary Policy Actions of the ECB

This paper uses data on German government bond futures options to examine the behaviour of market expectations around monetary policy actions of the European Central Bank (ECB). In particular, this paper focuses on the asymmetries in bond market expectations, as measured by the skewness of option-implied probability distributions of future bond yields. The results show that market expectations are systematically asymmetric around monetary policy actions of the ECB. Around monetary policy tightening, option-implied yield distributions are positively skewed, indicating that market participants attach higher probabilities for sharp yield increases than for sharp decreases. Correspondingly, around loosening of the policy, implied yield distributions are negatively skewed, suggesting that markets assign higher probabilities for sharp yield decreases than for increases. Furthermore, the results indicate that market expectations are significantly altered around monetary policy actions, as asymmetries in market expectations tend to increase before changes in the monetary policy stance, and to decrease afterwards.

Intraday data and hedging efficiency in interest spread trading

Three government bond futures contracts and their respective 3-month interest rate futures contracts traded on LIFFE are examined. The data period covers three years of observations, January 1994-December 1996, sampled at half-hourly intervals. Borrowing from the calculation of minimum variance hedge ratios, half-hourly minimum variance spread ratios (the ratio of one contract to another, which provides the minimum variance) are estimated for the above contracts. The hypothesis under examination is whether there is any value-added in estimating minimum spread ratios based on intraday data. Three spread ratios are defined: two ratios calculated from daily data and a third one based on intraday data. Evidence tends to indicate that spread ratios calculated from intraday data exhibit a substantially lower variance than the other two spread ratio speciications. Thus, it is shown that intraday data, in comparison with daily data, allow for lower hedging costs. Moreover, the use of intraday-based spread ratios might be a contributing factor to reducing the maximum cumulative loss potentially incurred while holding a spread position.

Volume versus GARCH effects reconsidered: an application to the Spanish Government Bond Futures Market

The mixture distribution model is one of the benchmarks for modelling the relationship between volume and return. A basic variable in that theoretical construction is the number of intraday equilibria, which is empirically unobservable. This paper re-examines the finding in Lamoureux and Lastrapes (Journal of Finance, 45, 1990) using alternative proxies for the number of intraday equilibria, which are included in the conditional variance equation of a GARCH model. The results show, using data of the Spanish Government Bond Futures Market for the 1992–94 period, that the number of transaction clusters and the average volume have a positive effect on conditional volatility.

The simulation of option prices with application to LIFFE options on futures

We build a framework for modelling the deviation of observed option prices from the Black & Scholes prices. We use a flexible model for a density, a two sided switching Weibull, to capture the implied volatility. The model can be used to generate prices, it can take into account no-arbitrage bounds for option prices and is capable of generating such stylised facts as the smile effect. We apply this methodology to LIFFE options on German government bond futures.

Pricing and quality option in Japanese government bond futures

An empirical study of the Hull - White model for pricing Treasury bond futures contracts with quality option is presented. Japanese long-term Government Bond (JGB) futures contracts are chosen, because unlike US Treasury bond futures contracts, which embed both the quality and timing options, the JGB contracts contain only the quality option. Interest rate model parameters are estimated using a simple regression technique and the yield curve is smoothed by B-spline functions with a correction for heteroscedasticity. By applying a discrete trinomial tree approach proposed by Hull and White, the quality option embedded in the JGB futures is then determined by the difference between the theoretical futures prices for contracts with and without allowing multiple deliverable grades. Without the addition of other timing options, the value of the pure quality option is less significant compared to those of other empirical studies. It is approximately 0.02 percentage points of par three months prior to delivery. In this study, it is demonstrated that the Hull - White model is simple and computationally efficient.

Price clustering and bid-ask spreads in international bond futures

We examine price clustering in government bond futures contracts traded at the London International Financial Futures and Options Exchange (LIFFE) and its impact on bid-ask spreads. This open outcry environment provides a rich dataset comprising all quotes and trades, in contrast to data from markets such as the Chicago Mercantile Exchange (CME), which only includes price-change transactions. The German and UK bond futures have low levels of price clustering, and bid-ask spreads are concentrated at the minimum tick size. In contrast, the Italian and Japanese contracts reveal considerably more clustering, and this coincides with wider spreads. We also present evidence on the relationship between the degree of price clustering and trade size.