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Profitability patterns in the interest rate derivatives market

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  • Ralf Meyer

    (EBS University)

Abstract

This study identifies profitability patterns and their determinants in the global interest rate derivatives market. Although this market is the world’s largest financial market in terms of nominal value, there has been basically no academic research on profitability owing to missing data. To address this problem, a new analytical method has been developed. Using this new method, the study shows that interest rate derivatives have been a substantial source of profitability that have netted a total average annual profit of more than USD 82 billion for banks since 2009. Furthermore, the study shows that counterparty type, market position (i.e. being one of the Top 5 banks), and trade currency are determinants of the profitability of a trade. For other features of a trade, such as duration or notional amount, no correlation with profitability is found. Finally, the impact of changes of the market structure on profitability driven by regulatory initiatives is discussed qualitatively.

Suggested Citation

  • Ralf Meyer, 2017. "Profitability patterns in the interest rate derivatives market," Review of Derivatives Research, Springer, vol. 20(3), pages 231-254, October.
    • Handle: RePEc:kap:revdev:v:20:y:2017:i:3:d:10.1007_s11147-017-9129-3
    DOI: 10.1007/s11147-017-9129-3
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    References listed on IDEAS

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    1. Andrew G. Atkeson & Andrea L. Eisfeldt & Pierre‐Olivier Weill, 2015. "Entry and Exit in OTC Derivatives Markets," Econometrica, Econometric Society, vol. 83, pages 2231-2292, November.
    2. Albert S. Kyle & S. Viswanathan, 2008. "How to Define Illegal Price Manipulation," American Economic Review, American Economic Association, vol. 98(2), pages 274-279, May.
    3. Andrew Atkeson & Andrea L. Eisfeldt & Pierre-Olivier Weill, 2013. "The market for OTC derivatives," Staff Report 479, Federal Reserve Bank of Minneapolis.
    4. Ekaterina E. Emm & Gerald D. Gay, 2005. "The global market for OTC derivatives: An analysis of dealer holdings," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 25(1), pages 39-77, January.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Interest rate derivatives; Derivatives; OTC markets; Market efficiency; Profitability; Counterparty;
    All these keywords.

    JEL classification:

    • D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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