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Are Derivatives Dangerous? a Literature Survey

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  • Gunther Capelle-Blancard

Abstract

Since the 1970s, the financial system has undergone deep structural changes. Innovation has been a key driver of these changes and most economists acknowledge that the impact has been positive overall. However, each time a financial crisis arises, the debate is on. Derivatives especially, which are among the major innovations of the past thirty years, cause deep concerns. In this paper, we propose a survey of the academic literature that has addressed the threats posed by derivatives. An initial issue is the impact of derivatives on the volatility of the underlying assets, but empirical findings do not suggest any significant effect. The recent literature on the dangers of derivatives is more concerned by systemic risks. Several studies suggest that the sophistication of the products and the concentration of risks are potential sources of instability because of the increasing uncertainty, the repeated occurrence of extreme losses, and finally the greater possibility of global crisis. Among the solutions that have been proposed to mitigate risk, beyond strengthening internal control, putting clearinghouses into general use and limiting naked-transactions seem to be the most promising avenues.

Suggested Citation

  • Gunther Capelle-Blancard, 2010. "Are Derivatives Dangerous? a Literature Survey," Working Papers 2010-24, CEPII research center.
  • Handle: RePEc:cii:cepidt:2010-24
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    References listed on IDEAS

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    1. Gunther Capelle-Blancard, 2003. "Marchés dérivés et trading de volatilité," Revue économique, Presses de Sciences-Po, vol. 54(3), pages 663-673.
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    Cited by:

    1. Gunther Capelle-Blancard & Dramane Coulibaly, 2011. "Index trading and agricultural commodity prices: A panel Granger causality analysis," International Economics, CEPII research center, issue 126-127, pages 51-71.
    2. Keffala, Mohamed Rochdi, 2015. "How using derivatives affects bank stability in emerging countries? Evidence from the recent financial crisis," Research in International Business and Finance, Elsevier, vol. 35(C), pages 75-87.

    More about this item

    Keywords

    Derivatives; Forwards; Futures; Options; Financial innovation; Speculation; OTC markets; Financial instability;

    JEL classification:

    • A1 - General Economics and Teaching - - General Economics
    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • G1 - Financial Economics - - General Financial Markets

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