Derivative Exposure and the Interest Rate and Exchange Rate Risks of U.S. Banks

Elyasiani, Elyas; Choi, Jongmoo Jay

doi:10.2139/ssrn.929

Cited by 67 publications

(59 citation statements)

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“…Exchange rate exposure is most prevalent in the periods before and after Sterling entered the European Exchange Rate Mechanism in the early 1990s. Choi et al (1992) and Choi and Elyasiani (1997) investigate the sensitivity of U.S. bank stock returns to market, interest and exchange rate risks. The market risk beta is significantly positive for all banks, the interest rate risk beta is significant for 23 out of 59 banks and the exchange rate risk beta significant for nearly all the banks (49 out of 59).…”

Section: Introductionmentioning

confidence: 99%

The response of industry stock returns to market, exchange rate and interest rate risks

Hyde

2007

Managerial Finance

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The working papers are produced by The University of Manchester -Manchester Business School and are to be circulated for discussion purposes only. Their contents should be considered to be preliminary. The papers are expected to be published in due course, in a revised form and should not be quoted without the authors' permission. Author(s) and affiliation AbstractThis study investigates the sensitivity of stock returns at the industry level to market, exchange rate and interest rate shocks in the four major European economies: France, Germany, Italy and the UK. In addition to exposure to the market, significant levels of exposure to both exchange rate risk, in the four countries, and interest rate risk, in France and Germany, are identified. Further, responses to sources of risk are decomposed into components attributable to news about future dividends, real interest rates and excess returns. All three sources of risk contain significant information about future cash flows and excess returns. Hyde, S. (2007). The response of industry stock returns to market, exchange rate and interest rate risks. Manchester Business School Working Paper, Number 2007-491, available: http://www.mbs.ac.uk/research/working-papers.aspx. How to quote or cite this documentThe response of industry stock returns to market, exchange rate and interest rate risksStuart Hyde * AbstractThis study investigates the sensitivity of stock returns at the industry level to market, exchange rate and interest rate shocks in the four major European economies: France, Germany, Italy and the UK. In addition to exposure to the market, significant levels of exposure to both exchange rate risk, in the four countries, and interest rate risk, in France and Germany, are identified. Further, responses to sources of risk are decomposed into components attributable to news about future dividends, real interest rates and excess returns. All three sources of risk contain significant information about future cash flows and excess returns.

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Section: Introductionmentioning

confidence: 99%

The response of industry stock returns to market, exchange rate and interest rate risks

Hyde

2007

Managerial Finance

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“…Choi et al (1992) and Chamberlain et al (1997) fail to find a strong association between banks' stock returns and foreign exchange fluctuations, while Choi and Elyasiani (1997) and Martin (2000) find that the majority of their sample banks are exposed to foreign exchange risk. Studies on the interest rate exposure of banks are also inconclusive.…”

Section: Brief Review Of the Literaturementioning

confidence: 85%

“…Hirtle (1997) shows that the use of derivatives plays a significant role in reducing banks' exposure to the interest rate risk. Choi and Elyasiani (1997), however, find that the use of derivatives increases banks' exposure to foreign exchange fluctuations beyond the level reflected in their traditional financial statement exposures. Chaudhry et al (2000) find that options increase US banks' exposure, but swaps reduce it.…”

Section: Brief Review Of the Literaturementioning

confidence: 95%

“…We use a GARCH-based multifactor model with time varying parameters to allow banks' exchange rate and interest rate exposures to vary over time 2 . Secondly, we argue that the capital market approach used by past empirical studies, such as Choi et al (1992), Wetmore and Brick (1994) and Choi and Elyasiani (1997), only measures the bank's foreign exchange and interest rate risks over and above that of the market portfolio. To estimate the bank's total exposure to the foreign exchange rate and interest rate movements, we use orthogonalised, rather than actual, market returns to measure the time varying exposure of Chinese banks…”

Section: Introductionmentioning

confidence: 95%

“…However, derivative trading may lead to excessive risk taking in countries with a weaker regulatory environment (Furman and Stiglitz 1998). Existing studies on the impact of derivative activities on the risk exposure of banks focus mainly on well-developed banking markets, such as the US (see, for example, Choi and Elyasiani 1997;Chaudhry et al 2000;Hentschel and Kothari 2001), Europe and Japan (Reichert and Shyu 2003). Empirical evidence of this type is scarce in less developed banking markets 1 .…”

Section: Introductionmentioning

confidence: 99%

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Bank risk, financial stress, and bank derivative use

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This paper distinguishes hedging from speculative derivative usage by U.S. bank holding companies (BHCs). This is accomplished by implementing a multi‐step procedure that relates the implied volatility from options on these banks, the broad components of the Cleveland Federal Reserve Bank Financial Stress Index, and off‐balance sheet derivatives. Our results indicate that BHCs with positive risk exposure to various financial stresses generally use interest rate, foreign exchange, equity, commodity, and credit derivatives to reduce their risk exposure to these financial stresses.

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Derivative Exposure and the Interest Rate and Exchange Rate Risks of U.S. Banks

Cited by 67 publications

References 33 publications

The response of industry stock returns to market, exchange rate and interest rate risks

The response of industry stock returns to market, exchange rate and interest rate risks

Derivative activities and Chinese banks’ exposures to exchange rate and interest rate movements

Bank risk, financial stress, and bank derivative use

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