Demand for crash insurance, intermediary constraints, and risk premia in financial markets

Hui Chen*, Scott Joslin, Xiaoyan NI

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

20 Citations (Scopus)

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.

Original languageEnglish
Pages (from-to)228-265
Number of pages38
JournalReview of Financial Studies
Volume32
Issue number1
DOIs
Publication statusPublished - 1 Jan 2019

Scopus Subject Areas

  • Accounting
  • Finance
  • Economics and Econometrics

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