Doctoral Dissertations

Tim W. Vines

Date of Award

8-1992

Degree Type

Dissertation

Degree Name

Doctor of Philosophy

Major

Business Administration

Major Professor

Ron Shrieves

Committee Members

George Philippatos, Harold Black, Jean Gauger, Jimmy Hilliard

Abstract

This dissertation examines the return distributions of portfolios containing Treasury securities and the Treasury Bond Futures Option. The two principle areas of investigation are the characteristics of the distributions and the effect on return of a number of portfolio properties. Information is provided about the similarity of covered call and protective put strategies using futures options to the evidence from equity option studies. Both strategies reduce return and dispersion relative to the spot portfolio, while the put portfolios increase positive asymmetry and the call portfolios provide negative asymmetry. As suggested by theory, banks and government bond dealers can benefit from the reduction in interest rate risk each strategy provides. However, the effect on return of the change in the asymmetry of the positions does not follow the predictions of the skewness preference literature. Evidence suggests that investor groups may exist which value these portfolios based on the convexity or concavity of the payoff functions. Other contributions of this study are: 1) verification with actual market price data of the opportunity expanding capabilities of option use; 2) a description of the relative performance of various measures of dispersion and asymmetry; 3) the use of a multivariate model which may be used for tests of a wide variety of studies of the investment behavior of individuals and institutions; and 4) the application of an error components model to account for the complex variation often encountered in studies that pool time series and cross-sectional data.

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