Abstract

http://ssrn.com/abstract=2024416
 
 

References (4)



 


 



Demand for Crash Insurance, Intermediary Constraints, and Risk Premia in Financial Markets


Hui Chen


Massachusetts Institute of Technology; National Bureau of Economic Research (NBER)

Scott Joslin


University of Southern California

Sophie X. Ni


Hong Kong University of Science and Technology

August 4, 2015

AFA 2013 San Diego Meetings Paper

Abstract:     
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


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Date posted: March 19, 2012 ; Last revised: August 6, 2015

Suggested Citation

Chen, Hui and Joslin, Scott and Ni, Sophie X., Demand for Crash Insurance, Intermediary Constraints, and Risk Premia in Financial Markets (August 4, 2015). AFA 2013 San Diego Meetings Paper. Available at SSRN: http://ssrn.com/abstract=2024416 or http://dx.doi.org/10.2139/ssrn.2024416

Contact Information

Hui Chen (Contact Author)
Massachusetts Institute of Technology ( email )
50 Memorial Drive
Cambridge, MA 02142
United States
617-324-3896 (Phone)
National Bureau of Economic Research (NBER) ( email )
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Scott Joslin
University of Southern California ( email )
Marshall School of Business
Los Angeles, CA 90089
United States
Sophie Xiaoyan Ni
Hong Kong University of Science and Technology ( email )
Clearwater Bay
Kowloon
Hong Kong
852-2358 5052 (Phone)
HOME PAGE: http://sophiexni.googlepages.com
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