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Funding Illiquidity Implied by S&P 500 Derivatives

Author

Listed:
  • Benjamin Golez

    (256 Mendoza College of Business, University of Notre Dame, Notre Dame, IN 46556, USA)

  • Jens Jackwerth

    (Department of Economics, University of Konstanz, P.O. Box 134, 78457 Konstanz, Germany)

  • Anna Slavutskaya

    (Finyon Consulting AG, Apollostrasse 2, 8032 Zürich, Switzerland)

Abstract

Based on the typical positions of S&P 500 option market makers, we derive a funding illiquidity measure from quoted prices of S&P 500 derivatives. Our measure significantly affects the returns of leveraged managed portfolios; hedge funds with negative exposure to changes in funding illiquidity earn high returns in normal times and low returns in crisis periods when funding liquidity deteriorates. The results are not driven by existing measures of funding illiquidity, market illiquidity, and proxies for tail risk. Our funding illiquidity measure also affects leveraged closed-end mutual funds and, to an extent, asset classes where leveraged investors are marginal investors.

Suggested Citation

  • Benjamin Golez & Jens Jackwerth & Anna Slavutskaya, 2024. "Funding Illiquidity Implied by S&P 500 Derivatives," Risks, MDPI, vol. 12(9), pages 1-33, September.
    • Handle: RePEc:gam:jrisks:v:12:y:2024:i:9:p:149-:d:1480362
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    References listed on IDEAS

    as
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    3. Bates, David S., 2003. "Empirical option pricing: a retrospection," Journal of Econometrics, Elsevier, vol. 116(1-2), pages 387-404.
    4. Markus K. Brunnermeier & Stefan Nagel & Lasse H. Pedersen, 2009. "Carry Trades and Currency Crashes," NBER Chapters, in: NBER Macroeconomics Annual 2008, Volume 23, pages 313-347, National Bureau of Economic Research, Inc.
    5. Elton, Edwin J. & Gruber, Martin J. & Blake, Christopher R. & Shachar, Or, 2013. "Why Do Closed-End Bond Funds Exist? An Additional Explanation for the Growth in Domestic Closed-End Bond Funds," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 48(2), pages 405-425, April.
    6. Boguth, Oliver & Simutin, Mikhail, 2018. "Leverage constraints and asset prices: Insights from mutual fund risk taking," Journal of Financial Economics, Elsevier, vol. 127(2), pages 325-341.
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