Demand for Crash Insurance, Intermediary Constraints, and Risk Premia in Financial Markets

Hui Chen (), Scott Joslin and Sophie X. Ni

No 25573, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: 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.

JEL-codes: G01 G12 G17 G2 (search for similar items in EconPapers)
Date: 2019-02
New Economics Papers: this item is included in nep-ias and nep-rmg
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Citations: View citations in EconPapers (16)

Published as Hui Chen & Scott Joslin & Sophie Xiaoyan Ni, 2019. "Demand for Crash Insurance, Intermediary Constraints, and Risk Premia in Financial Markets," The Review of Financial Studies, vol 32(1), pages 228-265.

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