Crash Risk in Individual Stocks

Paola Pederzoli
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Paola Pederzoli: University of Geneva and Swiss Finance Institute

No 18-31, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: In this study, I implement a novel methodology to extract crash risk premia from options and stock markets. I document a dramatic increase in crash risk premia after the 2008/2009 financial crisis, indicating that investors are willing to pay high insurance to hedge against crashes in individual stocks. My results apply to all sectors but are most pronounced for the financial sector. At the same time, crash risk premia on the market index remained at pre-crisis levels. I theoretically explain this puzzling feature in an economy where investors face short-sale constraints. Under short-sale constraints, prices are less informationally efficient which can explain the increase in downside risk in individual stocks. In the data, I document a strong link between proxies of short-sale constraints and crash risk premia.

Keywords: Skewness risk premium; financial crisis; short-selling constraints (search for similar items in EconPapers)
JEL-codes: G01 G12 G13 (search for similar items in EconPapers)
Pages: 68 pages
Date: 2018-03, Revised 2018-05
New Economics Papers: this item is included in nep-rmg
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Persistent link: https://EconPapers.repec.org/RePEc:chf:rpseri:rp1831

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