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

49 Pages Posted: 26 Feb 2019

See all articles by Hui Chen

Hui Chen

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

Scott Joslin

University of Southern California

Sophie Xiaoyan Ni

Hong Kong Baptist University (HKBU)

Multiple version iconThere are 2 versions of this paper

Date Written: February 2019

Abstract

We propose a new measure of financial intermediary constraints based on how the intermediaries manage their tail risk exposures. Using data for the trading activities in the market of deep out-of-the-money S&P 500 put options, we identify periods when the variations in the net amount of trading between financial intermediaries and public investors are likely to be mainly driven by shocks to intermediary constraints. We then infer tightness of intermediary constraints from the quantities of option trading during such periods. A tightening of intermediary constraint according to our measure is associated with increasing option expensiveness, higher risk premia for a wide range of financial assets, deterioration in funding liquidity, and broker-dealer deleveraging.

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Suggested Citation

Chen, Hui and Joslin, Scott and Ni, Sophie Xiaoyan, Demand for Crash Insurance, Intermediary Constraints, and Risk Premia in Financial Markets (February 2019). NBER Working Paper No. w25573. Available at SSRN: https://ssrn.com/abstract=3341133

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 Baptist University (HKBU) ( email )

Kowloon
Hong Kong

HOME PAGE: http://sites.google.com/site/sophiexni/

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