The Use of Financial Derivatives and Risks of U.S. Bank Holding Companies

49 Pages Posted: 30 Sep 2012 Last revised: 30 Jul 2014

See all articles by Shaofang Li

Shaofang Li

Southeast University - School of Economics and Management

Matej Marinc

University of Ljubljana - Faculty of Economics

Date Written: July 30, 2014

Abstract

This article examines the impact of financial derivatives on systematic risk of publicly listed U.S. bank holding companies (BHCs) from 1997 to 2012. We find that the use of financial derivatives is positively and significantly related to BHCs’ systematic risk exposures. Higher use of interest rate derivatives, exchange rate derivatives, and credit derivatives corresponds to greater systematic interest rate risk, exchange rate risk, and credit risk. The positive relationship between derivatives and risks persists for derivatives for trading as well as for derivatives for hedging. We also analyze the role of BHCs’ size and capital and the impact of the global financial crisis on the relationship between derivatives and risks.

Keywords: Financial Derivatives, Interest Rate Derivatives, Exchange Rate Derivatives, Credit Derivatives, Systematic Risk

JEL Classification: G20, G21, G28

Suggested Citation

Li, Shaofang and Marinc, Matej, The Use of Financial Derivatives and Risks of U.S. Bank Holding Companies (July 30, 2014). Forthcoming at the International Review of Financial Analysis, presented at Midwest Finance Association 2013, APAD 2013, AIDEA 2013, INFINITI 2014, Available at SSRN: https://ssrn.com/abstract=2154162 or http://dx.doi.org/10.2139/ssrn.2154162

Shaofang Li (Contact Author)

Southeast University - School of Economics and Management ( email )

Sipailou 2#
Nanjing, Jiangsu Province 210096
China

Matej Marinc

University of Ljubljana - Faculty of Economics ( email )

Kardeljeva ploscad 17
Ljubljana, 1000
Slovenia

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