WORKING PAPERS

Options Market Makers, with Jianfeng Hu, Dmitriy Muravyev, and Doojin Ryu - R&R at Journal of Financial Economics

Options market makers (OMMs) facilitate most option trades, yet little is known about how they perform and manage risk. Using unique account-level data for KOSPI 200 index options and futures, we conduct the first study of individual OMMs. OMMs earn high Sharpe ratios, with positive profits on 74% of days. They reduce risk primarily by rebalancing inventory within minutes, rather than relying on costly delta hedging. Indeed, only four of 43 market makers in our sample consistently delta hedge. Consistent with KOSPI 200 results, S&P 500 OMMs turn over positions rapidly, as their daily trading volume exceeds net position changes by a factor of 32. Our findings support classic microstructure theories emphasizing inventory management and challenge the widespread belief that OMMs always fully delta hedge.

• Presented at: 
  Spanish Finance Forum 2024 - BME Award for Best Paper on Derivative Markets, 2023 Cancun Derivatives Workshop, 2nd Structured Retail Products and Derivatives Conference, 17th International Conference on Computational and Financial Econometrics (CFE), University of Liverpool, Singapore Management University, CUNEF Universidad, University of Florence

When Corporate Risk Management Amplifies Risks: Evidence from Europe’s Energy Crisis in 2022, with Alessandro Giannozzi - R&R at Journal of Banking and Finance

Derivatives are important risk management tools for hedging price risks but can expose firms to the risk of margin calls in times of market stress. This study investigates the impact of large margin calls on companies' financial outcomes. We document that most companies meet margin requirements through borrowing, but firms without preexisting relationships with lenders resort to asset sales. Importantly, we show that margin calls have significant negative consequences for companies’ default risk, cost of debt, and profit margins, and some of these effects persist for more than a year after the margin calls. Our evidence derives from the European energy crisis in 2022, when energy corporations had to deposit significant amounts of cash to cover margin calls related to commodity hedges. However, the results may be generalized to other markets and highlight the need for corporate risk management to consider margin call and liquidity risks tied to derivatives use.

• Presented at: 
  International Risk Management Conference (IRMC) 2024, CUNEF Universidad

Retail Trading on Anomalies, with Ekkehart Boehmer

We study retail investor activity in the extreme portfolios of well-known cross-sectional anomalies. In general, retail investors tend to trade in the opposite direction of anomalies (buying stocks in the short portfolios and selling stocks in the long portfolios), both before and after the anomaly variables become public information. However, we do not find evidence that retail trading is the cause of mispricing and subsequent return predictability. Stocks with high retail participation do not appear to be more mispriced after controlling for firm size. Instead of pushing prices away from fundamentals, contrarian retail trades are likely to provide liquidity to arbitrageurs who trade on the anomalies. In addition, we uncover a subset of retail trades those executed by retail short sellers which exploit anomaly information correctly. In particular, retail short sales help to correct mispricing of overvalued stocks in the short portfolios of value-versus-growth anomalies.

• Presented at: 
  FMA European Conference 2022, Spanish Finance Forum 2022, University of Florence 4th International Week, CUNEF Universidad, Singapore Management University