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Crash Risk in Individual Stocks

Author

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  • Paola Pederzoli

    (University of Geneva and Swiss Finance Institute)

Abstract

In this study, I implement a novel methodology to extract crash risk premia from options and stock markets. I document a dramatic increase in crash risk premia after the 2008/2009 financial crisis, indicating that investors are willing to pay high insurance to hedge against crashes in individual stocks. My results apply to all sectors but are most pronounced for the financial sector. At the same time, crash risk premia on the market index remained at pre-crisis levels. I theoretically explain this puzzling feature in an economy where investors face short-sale constraints. Under short-sale constraints, prices are less informationally efficient which can explain the increase in downside risk in individual stocks. In the data, I document a strong link between proxies of short-sale constraints and crash risk premia.

Suggested Citation

  • Paola Pederzoli, 2018. "Crash Risk in Individual Stocks," Swiss Finance Institute Research Paper Series 18-31, Swiss Finance Institute, revised May 2018.
    • Handle: RePEc:chf:rpseri:rp1831
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    More about this item

    Keywords

    Skewness risk premium; financial crisis; short-selling constraints;
    All these keywords.

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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