Document Type

Journal Article

Department/Unit

Department of Finance and Decision Sciences

Language

English

Abstract

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.

Keywords

Asset Pricing, Trading volume, Bond Interest Rates, Financial Crises, E44 - Financial Markets and the Macroeconomy, Financial Institutions and Services, Contingent Pricing, Futures Pricing

Publication Date

1-2019

Source Publication Title

The Review of Financial Studies

Volume

32

Issue

1

Start Page

228

End Page

265

Publisher

Oxford University Press

DOI

10.1093/rfs/hhy004

Link to Publisher's Edition

https://doi.org/10.1093/rfs/hhy004

ISSN (print)

08939454

ISSN (electronic)

14657368

Available for download on Monday, February 01, 2021

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