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

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Author Info
Jongmoo Jay Choi
Elyas Elyasiani
Abstract

This paper estimates the interest rate and exchange rate risk betas of fifty-nine large U. S. commercial banks for the period of 1975-1992, as well as the bank-specific determinants of these betas. The estimation procedure uses a modified seemingly unrelated simultaneous method that recognizes cross-equation dependencies and adjusts for serial correlation and heteroskedasticity. Overall, the exchange rate risk betas are more significant than the interest rate risk betas. More importantly, we find a link between the scale of a bank's interest rate and currency derivative contracts and the bank's interest rate and exchange rate risks. Particularly noteworthy is the influence of currency derivatives on exchange rate betas.

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Paper provided by Wharton School Center for Financial Institutions, University of Pennsylvania in its series Center for Financial Institutions Working Papers with number 96-53.

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Date of creation: Nov 1996
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Handle: RePEc:wop:pennin:96-53

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Related research
Keywords: Off-balance sheet; Bank risk Derivatives; Interest rate risk; Exchange risk exposure JEL classification: G2; Gl; F3;

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G2 - Financial Economics - - Financial Institutions and Services
F3 - International Economics - - International Finance

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  4. Hassan, M. Kabir & Karels, Gordon V. & Peterson, Manfred O., 1994. "Deposit insurance, market discipline and off-balance sheet banking risk of large U.S. commercial banks," Journal of Banking & Finance, Elsevier, vol. 18(3), pages 575-593, May. [Downloadable!] (restricted)
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  6. Yourougou, Pierre, 1990. "Interest-rate risk and the pricing of depository financial intermediary common stock : Empirical evidence," Journal of Banking & Finance, Elsevier, vol. 14(4), pages 803-820, October. [Downloadable!] (restricted)
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  17. Jorion, Philippe, 1991. "The Pricing of Exchange Rate Risk in the Stock Market," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 26(03), pages 363-376, September. [Downloadable!]
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