Funding Illiquidity Implied by S&P 500 Derivatives

Benjamin Golez, Jens Jackwerth () and Anna Slavutskaya
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Benjamin Golez: 256 Mendoza College of Business, University of Notre Dame, Notre Dame, IN 46556, USA
Jens Jackwerth: Department of Economics, University of Konstanz, P.O. Box 134, 78457 Konstanz, Germany
Anna Slavutskaya: Finyon Consulting AG, Apollostrasse 2, 8032 Zürich, Switzerland

Risks, 2024, vol. 12, issue 9, 1-33

Abstract: Based on the typical positions of S&P 500 option market makers, we derive a funding illiquidity measure from quoted prices of S&P 500 derivatives. Our measure significantly affects the returns of leveraged managed portfolios; hedge funds with negative exposure to changes in funding illiquidity earn high returns in normal times and low returns in crisis periods when funding liquidity deteriorates. The results are not driven by existing measures of funding illiquidity, market illiquidity, and proxies for tail risk. Our funding illiquidity measure also affects leveraged closed-end mutual funds and, to an extent, asset classes where leveraged investors are marginal investors.

Keywords: funding illiquidity; hedge funds; risk premium; return prediction (search for similar items in EconPapers)
JEL-codes: C G0 G1 G2 G3 K2 M2 M4 (search for similar items in EconPapers)
Date: 2024
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