Bank Risk, Financial Stress, and Bank Derivative Use

39 Pages Posted: 9 Oct 2017

See all articles by Barbara A. Bliss

Barbara A. Bliss

University of San Diego

Jeffrey A. Clark

Florida State University - College of Business

Jared DeLisle

Utah State University

Date Written: October 6, 2017

Abstract

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 traded options on these banks, broad components of the Cleveland Fed 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. Additionally, positively exposed BHCs that use credit and equity derivatives to reduce interbank stress risk have stock performance that bests that of BHCs which do not use such derivatives.

Keywords: Bank Risk, Financial Stress, Derivatives, Hedging

Suggested Citation

Bliss, Barbara A. and Clark, Jeffrey A. and DeLisle, Jared, Bank Risk, Financial Stress, and Bank Derivative Use (October 6, 2017). Available at SSRN: https://ssrn.com/abstract=3049073 or http://dx.doi.org/10.2139/ssrn.3049073

Barbara A. Bliss

University of San Diego ( email )

5998 Alcala Park
San Diego, CA 92110-2492
United States

Jeffrey A. Clark

Florida State University - College of Business ( email )

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

Jared DeLisle (Contact Author)

Utah State University ( email )

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

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