Demand for Crash Insurance, Intermediary Constraints, and Risk Premia in Financial Markets
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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.
Review of Financial Studies
Oxford University Press (OUP)
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)