Bank Risk, Implied Volatility and Bank Derivative Use: Implications for Future Performance

36 Pages Posted: 22 Jan 2008 Last revised: 17 Jul 2008

See all articles by Jeffrey A. Clark

Jeffrey A. Clark

Florida State University - College of Business

James Doran

University of New South Wales

Jared DeLisle

Utah State University

Date Written: January 15, 2008

Abstract

This paper attempts to distinguish hedging versus speculative derivative usage by U.S. bank holding companies, and whether that has implications for future performance. This is accomplished by implementing a multi-step procedure that relates the implied volatility from traded options on these banks, macroeconomic factors, and off-balance sheet derivatives. Our results indicate that the relationship between risk sensitivity and derivative usage is strongest for interest rate and foreign exchanges activities. Additionally, we demonstrate that speculators outperform hedgers in managing interest rate risk but underperform hedgers in managing foreign exchange risk (US/JPN). There is little difference in performance for the other derivative products, but this is not surprising since the value of these derivative positions are small by comparison.

Keywords: Implied Volatility, Bank Risk, Derivative Use

JEL Classification: G10, G21, G31

Suggested Citation

Clark, Jeffrey A. and Doran, James and DeLisle, Jared, Bank Risk, Implied Volatility and Bank Derivative Use: Implications for Future Performance (January 15, 2008). Available at SSRN: https://ssrn.com/abstract=1086044 or http://dx.doi.org/10.2139/ssrn.1086044

Jeffrey A. Clark

Florida State University - College of Business ( email )

423 Rovetta Business Building
Tallahassee, FL 32306-1110
United States

James Doran (Contact Author)

University of New South Wales ( email )

College Rd
Sydney, NSW 2052
Australia

Jared DeLisle

Utah State University ( email )

Logan, UT 84322
United States
435-797-0885 (Phone)

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