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Margin Requirements and Equity Option Returns

Research output: Contribution to conferencePaper

In equity option markets, traders face margin requirements both for the options themselves and for hedging-related positions in the underlying stock market. We show that these requirements carry a significant "margin premium" in the cross-section of equity option returns. The sign of the margin premium depends on demand pressure: If end-users are on the long side of the market, option returns decrease with margins, while they increase otherwise. Our results are statistically and economically significant and robust to different margin specifications and various control variables. We explain our findings by a model of funding-constrained derivatives dealers that require compensation for satisfying end-users’ option demand.

Publication information

Original languageEnglish
Publication date2017
Number of pages52
StatePublished - 2017
EventThe 44th European Finance Association Annual Meeting (EFA 2017) - University of Mannheim, Mannheim, Germany
Duration: 23 Aug 201726 Aug 2017
Conference number: 44
https://www.conftool.com/efa2017/

Conference

ConferenceThe 44th European Finance Association Annual Meeting (EFA 2017)
Number44
LocationUniversity of Mannheim
CountryGermany
CityMannheim
Period23/08/201726/08/2017
Internet address

    Research areas

  • Equity options, Margins, Funding liquidity, Cross-section of option returns

ID: 54571892