Margin Requirements and Equity Option Returns∗
Margin Requirements and Equity Option Returns∗ Steffen Hitzemann† Michael Hofmann‡ Marliese Uhrig-Homburg§ Christian Wagner¶ December 2017 Abstract In equity option markets, traders face margin requirements both for the options them- selves 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. Keywords: equity options, margins, funding liquidity, cross-section of option returns JEL Classification: G12, G13 ∗We thank Hameed Allaudeen, Mario Bellia, Jie Cao, Zhi Da, Matt Darst, Maxym Dedov, Bjørn Eraker, Andrea Frazzini, Ruslan Goyenko, Guanglian Hu, Hendrik Hülsbusch, Kris Jacobs, Stefan Kanne, Olaf Korn, Dmitriy Muravyev, Lasse Pedersen, Matthias Pelster, Oleg Rytchkov, Ivan Shaliastovich, as well as participants of the 2017 EFA Annual Meeting, the SFS Cavalcade North America 2017, the 2017 MFA Annual Meeting, the SGF Conference 2017, the Conference on the Econometrics of Financial Markets, the 2016 Annual Meeting of the German Finance Association, the Paris December 2016 Finance Meeting, and seminar participants at the Center for Financial Frictions at Copenhagen Business School, the CUHK Business School, the University of Gothenburg, and the University of Wisconsin-Madison for valuable discussions and helpful comments and suggestions.
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