Abstract
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.
Original language | English |
---|---|
Publication date | 2018 |
Number of pages | 52 |
Publication status | Published - 2018 |
Event | The 78th Annual Meeting of American Finance Association. AFA 2018 - Philadelphia, United States Duration: 5 Jan 2018 → 7 Jan 2018 Conference number: 78 https://editorialexpress.com/conference/AFA2018/program/AFA2018.html |
Conference
Conference | The 78th Annual Meeting of American Finance Association. AFA 2018 |
---|---|
Number | 78 |
Country/Territory | United States |
City | Philadelphia |
Period | 05/01/2018 → 07/01/2018 |
Internet address |
Keywords
- Equity options
- Margins
- Funding liquidity
- Cross-section of option returns