Demand for Crash Insurance, Intermediary Constraints, and Risk Premia in Financial Markets
Massachusetts Institute of Technology; National Bureau of Economic Research (NBER)
University of Southern California
Sophie X. Ni
Hong Kong University of Science and Technology
August 4, 2015
AFA 2013 San Diego Meetings Paper
We propose a new measure for the variations in intermediary constraints by observing how financial intermediaries manage their tail risk exposures. Using a unique dataset on the trading activities in the market for deep out-of-the-money S&P 500 put options, we identify periods when shocks to intermediary constraints are likely to be the main driver of the variation in the net amount of trading between public investors and financial intermediaries, which enables us to infer variations in intermediary constraints from the quantities of trading. Besides its effects on option pricing, our measure of intermediary constraint shocks is a strong predictor of future returns for a wide range of financial assets, and it is connected to existing funding constraint measures based on changes in broker-dealer leverage.
Number of Pages in PDF File: 68
Keywords: Intermediary constraint, tail risk, SPX option, return predictability, supply shocks, leverage
JEL Classification: E44, G12, G13, G20
Date posted: March 19, 2012 ; Last revised: August 6, 2015
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