Demand for Crash Insurance, Intermediary Constraints, and Risk Premia in Financial Markets
Name
w25573.pdf
Description
Submitted version
Size
432.66 KB
Format
Adobe PDF
Checksum (MD5)
7ad7bfdfc8f3d74c2b0e83c921a07b9b
Author(s)
Chen, Hui
Date Issued
May 2018
Journal
Review of Financial Studies
Publisher
Oxford University Press (OUP)
Citation
Chen, Hui et al. “Demand for Crash Insurance, Intermediary Constraints, and Risk Premia in Financial Markets.” Review of Financial Studies, 32, 1 (May 2018): 228–265 © 2018 The Author(s)
Version
Original manuscript
Abstract
We propose a new measure of financial intermediary constraints based on how intermediaries manage their tail risk exposures. Using data for the trading activities in the market of deep out-of-the-money index 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. A tightening of intermediary constraints according to our measure is associated with increasing option expensiveness, higher risk premia, deteriorating funding liquidity, and broker-dealer deleveraging.
MIT Department
Sloan School of Management
Terms of Use
Creative Commons Attribution-Noncommercial-Share Alike
Persistent DSpace Link
DOI of Published Version
https://doi.org/10.1093/RFS/HHY004
