Crash Risk in Individual Stocks
66 Pages Posted: 1 Nov 2016 Last revised: 20 Nov 2017
Date Written: November 20, 2017
In this study, I develop a novel methodology to extract crash risk premia from options and stock markets. I document a dramatic increase in crash risk premia after the 2008/2009 nancial crisis, indicating that investors are willing to pay high insurance to hedge against crashes in individual stocks. My results apply to all sectors but are most pronounced for the financial and industrial sectors. At the same time, crash risk premia on the market index remained at pre-crisis levels. I theoretically explain this puzzling feature in an economy where investors face short-sale constraints. Under short-sale constraints, prices are less informationally efficient which can explain the increase in downside risk in individual stocks. In the data, I document a strong link between proxies of short-sale constraints and crash risk premia.
Keywords: risk premium, skewness, risk neutral skewness, realised skewness, financial crisis, equity market, empirical asset pricing, trading strategy
JEL Classification: G11, G12, G13
Suggested Citation: Suggested Citation