Funding Illiquidity Implied by S&P 500 Derivatives
76 Pages Posted: 8 Aug 2015 Last revised: 14 Mar 2018
Date Written: February 2018
Based on the typical positions of S&P 500 option market makers, we derive a funding illiquidity measure from quoted prices of S&P 500 derivatives. Our measure significantly affects the returns of leveraged managed portfolios; hedge funds with negative exposure to changes in funding illiquidity earn high returns in normal times and low returns in crisis periods when funding liquidity deteriorates. The results are not driven by existing measures of funding illiquidity, market illiquidity, and proxies for tail risk. Our funding illiquidity measure also affects leveraged closed-end mutual funds and, to an extent, asset classes where leveraged investors are marginal investors.
Keywords: funding illiquidity, hedge funds, risk premium, return prediction
JEL Classification: G10, G11, G12
Suggested Citation: Suggested Citation