TY - JOUR
T1 - Demand for crash insurance, intermediary constraints, and risk premia in financial markets
AU - Chen, Hui
AU - Joslin, Scott
AU - Ni, Xiaoyan
N1 - Funding Information:
We thank Tobias Adrian, David Bates, Robert Battalio, Geert Bekaert, Harjoat Bhamra, Ken French, Nicolae Garleanu, Zhiguo He, Boris Ilyevsky, Gary Katz, Bryan Kelly, Lei Lian, Andrew Lo, Dmitriy Muravyev, Jun Pan, Lasse Pedersen, Steve Ross, Paul Stephens, Ken Singleton, Emil Siriwardane, Moto Yogo, and Hao Zhou and participants at numerous conferences and seminars for comments. We thank Ernest Liu for excellent research assistance. Ni acknowledges the financial support from Hong Kong RGC (644311). Supplementary data can be found on The Review of Financial Studies Web site. Send correspondence to Hui Chen, MIT Sloan School of Management, 77 Massachusetts Avenue, E62-637, Cambridge, MA 02139; telephone: 617-324-3896. E-mail: [email protected].
Funding Information:
PNBO is the net amount of deep out-of-the-money (DOTM)(with K/S ≤0.85) SPX puts public investors buying-to-open each month. PNBON is PNBO normalized by average of previous 3-month total volume from public investors. “Asian” (Oct. 1997): period around the Asian financial crisis. “Russian” (Nov. 1998): period around Russian default. “Iraq” (Apr. 2003): start of the Iraq War. “Quant” (Aug. 2007): the crisis of quant-strategy hedge funds. “Bear Sterns” (Mar. 2008): acquisition of Bear Sterns by J. P. Morgan. “Lehman” (Sept. 2008): Lehman bankruptcy. “TARP” (Oct. 2008): establishment of TARP. “TALF1” (Nov. 2008): creation of TALF. “BoA” (Jan. 2009): Treasury, Fed, and FDIC assistance to Bank of America. “TALF2” (Feb. 2009): increase of TALF to $1 trillion. “Euro” (Dec. 2009): escalation of Greek debt crisis. “GB1” (Apr. 2010): Greece seeks financial support from euro and IMF. “EFSF” (May 2010): establishment of EFSM and EFSF; 110 billion bailout package to Greece agreed. “GB2” (Sept. 2010): a second Greek bailout installment. “Voluntary” (Jun. 2011): Merkel agrees to voluntary Greece bondholder role. “Referendum” (Oct. 2011): further escalation of Euro debt crisis with the call for a Greek referendum.
PY - 2019/1/1
Y1 - 2019/1/1
N2 - 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.
AB - 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.
UR - http://www.scopus.com/inward/record.url?scp=85066922418&partnerID=8YFLogxK
U2 - 10.1093/rfs/hhy004
DO - 10.1093/rfs/hhy004
M3 - Journal article
AN - SCOPUS:85066922418
SN - 0893-9454
VL - 32
SP - 228
EP - 265
JO - Review of Financial Studies
JF - Review of Financial Studies
IS - 1
ER -