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Derivatives usage, securitization, and the crash sensitivity of bank stocks

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  • Trapp, Rouven
  • Weiß, Gregor N.F.

Abstract

We show that the information on derivatives usage and securitization activities of U.S. banks as disclosed in their pre-crisis 10-K filings explains extreme equity returns of banks during the financial crisis. Stocks of banks that had previously disclosed a more extensive use of financial derivatives and loan securitization were more likely to experience extreme losses. Our findings are consistent with investors viewing banks that used derivatives for non-hedging purposes as highly vulnerable to the crisis. Moreover, banks which had significant securitization activities and were thus potentially exposed to under-capitalized risks from conduits possess a higher vulnerability of their equity to market downturns.

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  • Trapp, Rouven & Weiß, Gregor N.F., 2016. "Derivatives usage, securitization, and the crash sensitivity of bank stocks," Journal of Banking & Finance, Elsevier, vol. 71(C), pages 183-205.
  • Handle: RePEc:eee:jbfina:v:71:y:2016:i:c:p:183-205
    DOI: 10.1016/j.jbankfin.2016.07.001
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    Cited by:

    1. Maarten van Oordt, 2017. "Credit Risk Transfer and Bank Insolvency Risk," Staff Working Papers 17-59, Bank of Canada.
    2. repec:eee:finana:v:61:y:2019:i:c:p:245-254 is not listed on IDEAS

    More about this item

    Keywords

    Financial crisis; Equity tail risk; Derivatives; Securitization; Risk disclosure;

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • M40 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - General
    • G01 - Financial Economics - - General - - - Financial Crises

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