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

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  • 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.

Suggested Citation

  • Jongmoo Jay Choi & Elyas Elyasiani, 1996. "Derivative Exposure and the Interest Rate and Exchange Rate Risks of U.S. Banks," Center for Financial Institutions Working Papers 96-53, Wharton School Center for Financial Institutions, University of Pennsylvania.
    • Handle: RePEc:wop:pennin:96-53
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    References listed on IDEAS

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    Cited by:

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    3. Schüler, Martin, 2002. "The threat of systemic risk in banking: evidence for Europe," ZEW Discussion Papers 02-21, ZEW - Leibniz Centre for European Economic Research.
    4. Pariyada Sukcharoensin, 2013. "Time-Varying Market, Interest Rate and Exchange Rate Risks of Thai Commercial Banks," Asian Academy of Management Journal of Accounting and Finance (AAMJAF), Penerbit Universiti Sains Malaysia, vol. 9(1), pages 25-45.

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    More about this item

    Keywords

    Off-balance sheet; Bank risk Derivatives; Interest rate risk; Exchange risk exposure JEL classification: G2; Gl; F3;
    All these keywords.

    JEL classification:

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

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