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 journalJournal articlepeer-review

    37 Citations (Scopus)
    43 Downloads (Pure)

    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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