Funding Illiquidity Implied by S&P 500 Derivatives

76 Pages Posted: 8 Aug 2015 Last revised: 14 Mar 2018

See all articles by Benjamin Golez

Benjamin Golez

University of Notre Dame

Jens Carsten Jackwerth

University of Konstanz - Department of Economics

Anna Slavutskaya

Ecole Polytechnique Fédérale de Lausanne

Date Written: February 2018

Abstract

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

Golez, Benjamin and Jackwerth, Jens Carsten and Slavutskaya, Anna, Funding Illiquidity Implied by S&P 500 Derivatives (February 2018). Available at SSRN: https://ssrn.com/abstract=2640697 or http://dx.doi.org/10.2139/ssrn.2640697

Benjamin Golez (Contact Author)

University of Notre Dame ( email )

256 Mendoza College of Business
Notre Dame, IN 46556-5646
United States
(574) 631-1458 (Phone)

HOME PAGE: http://business.nd.edu/BenGolez/

Jens Carsten Jackwerth

University of Konstanz - Department of Economics ( email )

Universitaetsstr. 10
Konstanz, 78457
Germany
+497531882196 (Phone)
+497531883120 (Fax)

HOME PAGE: http://cms.uni-konstanz.de/wiwi/jackwerth/

Anna Slavutskaya

Ecole Polytechnique Fédérale de Lausanne ( email )

EPFL CDM SFI
EXTRA 248 (Extranef UNIL), Quartier UNIL-Dorigny
1015 Lausanne, CH-1015
Switzerland

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