Demand for Crash Insurance, Intermediary Constraints, and Risk Premia in Financial Markets / Hui Chen, Scott Joslin, Sophie X. Ni.

Format:

Book

Author/Creator:

Chen, Hui.

Contributor:

National Bureau of Economic Research.

Joslin, Scott.

Ni, Sophie X.

Series:

Working Paper Series (National Bureau of Economic Research) no. w25573.

NBER working paper series no. w25573

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2019.

Summary:

We propose a new measure of financial intermediary constraints based on how the intermediaries manage their tail risk exposures. Using data for the trading activities in the market of deep out-of-the-money S&P 500 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 during such periods. A tightening of intermediary constraint according to our measure is associated with increasing option expensiveness, higher risk premia for a wide range of financial assets, deterioration in funding liquidity, and broker-dealer deleveraging.

Notes:

Print version record

February 2019.