Finance Area Seminar: Laurent Calvet
Laurent Calvet
SKEMA Business School
How Do Households Suppress The Price Of Tail Risk?
Date: Friday, April 25, 2025
Time: 10:30 AM - 11:45 AM
Location: Bronfman building, Room 340
All are cordially invited to attend.
Abstract
We examine how households dampen volatility prices through their demand for Short Put Products (SPPs) - a globally popular structured product that offers high headline rates in exchange for selling a put option. Using a comprehensive dataset covering all index-linked SPP issuances worldwide since market inception, we empirically show that SPP issuance volumes rise when the volatility of the underlying asset is high, as higher volatility allows to offer higher headline rates. In turn, increased SPP issuance drives down the prices of deeply out-of-the-money put options, suppressing the corresponding volatility risk premium. To uncover the underlying mechanism and quantify the equilibrium effects of these innovative products on volatility prices, we develop a structural model in which households underweight left-tail risk, driving demand for SPPs. Risk-averse financial intermediaries optimize the headline rate offered on these products while imperfectly hedging their exposure. As volatility rises, stronger demand for SPPs -- driven by higher headline rates -- exerts downward pressure on option prices, particularly at strikes below 100\%. Our findings reveal a novel channel for enhancing financial stability: household demand for innovative security designs lowers the cost of insuring against left-tail risk for other market participants.
