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Hedging, market concentration and monetary policy: a joint analysis of gilt and derivatives exposures

Author

Listed:
  • Pinter, Gabor

    (Bank of England)

  • Walker, Danny

    (Bank of England)

Abstract

We use granular data sets – merged across the UK government bond, interest rate swap, options and futures markets – to estimate exposures to interest rate risk at the sector level and for individual funds within the same sector. We focus on non-bank financial intermediaries (NBFIs) such as insurance companies, pension funds, asset managers and hedge funds. We find that NBFIs tend to use derivatives to amplify bond market exposures to interest rate risk, rather than to hedge them. Moreover, interest rate derivatives usage is highly concentrated among a few investors, which could increase the aggregate consequences of idiosyncratic shocks to these investors. We show that this market concentration impedes the monetary policy transmission to asset prices. We also find that monetary policy loosening (tightening) causes NBFIs to take on more (less) interest rate risk via derivatives, consistent with the risk-taking channel of monetary policy.

Suggested Citation

  • Pinter, Gabor & Walker, Danny, 2023. "Hedging, market concentration and monetary policy: a joint analysis of gilt and derivatives exposures," Bank of England working papers 1032, Bank of England.
    • Handle: RePEc:boe:boeewp:1032
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    File URL: https://www.bankofengland.co.uk/-/media/boe/files/working-paper/2023/hedging-market-concentration-and-monetary-policy-a-joint-analysis-of-gilt-and-derivatives-exposures.pdf
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    Cited by:

    1. Barria, Rodrigo & Pinter, Gabor, 2023. "Mispricing in inflation markets," Bank of England working papers 1034, Bank of England.

    More about this item

    Keywords

    Interest rate risk; hedging; swaps; options; gilts; futures; NBFI;
    All these keywords.

    JEL classification:

    • D40 - Microeconomics - - Market Structure, Pricing, and Design - - - General
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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