Estimating The Value Of Delivery Option Of Treasury Futures

In order to study when an reversal arbitrage in practice between Treasury futures and spot shall be done,this paper proposes a new solution: theoratically,implied repo rate(IRR)of Treasury futures should behave differently whether there exists chances of arbitrage between futures and spot-the IRR should regress more intensely during arbitrage,and IRR’s critical value of arbitrage minus the cost of funds is exactly the value of delivery option,whose estimation is the main purpose of this paper.Based on this thread,this paper estimates the value of delivery option of Treasury futures from the aspect of reversal arbitrage practice,using threshold autoregressive(TAR)model,and discovers the existence of single threshold with Hansen(1996)’s threshold effect test and plot test.The fact that the estimated TAR model is consistent with the arbitrage theory prove,in some ways,the feasibility of the thread and estimation method.