FRIC/Finance Seminar with Hui Chen, MIT Sloan
FRIC Center for Financial Frictions and the Department of Finance are proud to announce the upcoming seminar with Hui Chen, MIT Sloan
Hui Chen will present:
Hui Chen, MIT Sloan and NBER
Scott Joslin, USC Marshall
Sophie Ni, Hong Kong University of Science and Technology
The net amount of deep out-of-the-money (DOTM) S&P 500 put options that public investors purchase (or equivalently, the amount that financial intermediaries sell) in a month is a strong predictor of future market returns and the returns on many other assets. A one-standard deviation decrease in our public net buying-to-open measure (PNBO) is associated with a 3.4% increase in the subsequent 3-month market excess return. Consistent with the effects of supply shocks, periods of low PNBO are associated with high variance premium and steeper slopes of the implied volatility curve in the options market. Moreover, low PNBO is also associated with slower growth in broker-dealer leverages. To explain these findings, we build a general equilibrium model of the crash insurance market, where time variation in intermediaries' constraints help generate the dynamic relationships between equilibrium public demand for crash insurance, intermediary leverage, and the market risk premium. Our results suggest that the way financial intermediaries manage their tail risk exposures provides unique information about intermediary constraints.