Sophie X. Ni
Department of Finance and Decision Science
Hong Kong Baptist University
Kowloon Tang, Hong Kong
Institutional Affiliation: Hong Kong Baptist University
NBER Working Papers and Publications
|February 2019||Demand for Crash Insurance, Intermediary Constraints, and Risk Premia in Financial Markets|
with Hui Chen, Scott Joslin: w25573
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.
Published: 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.
|May 2015||Days to Cover and Stock Returns|
with Harrison Hong, Weikai Li, Jose A. Scheinkman, Philip Yan: w21166
The short ratio - shares shorted to shares outstanding - is an oft-used measure of arbitrageurs’ opinion about a stock’s over-valuation. We show that days-to-cover (DTC), which divides a stock’s short ratio by its average daily share turnover, is a more theoretically well-motivated measure because trading costs vary across stocks. Since turnover falls with trading costs, DTC is approximately the marginal cost of the shorts. At the arbitrageurs’ optimum it equals the marginal benefit, which is their opinion about over-valuation. DTC is a better predictor of poor stock returns than short ratio. A long-short strategy using DTC generates a 1.2% monthly return.