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

  • Jongmoo Jay Choi
  • Elyas Elyasiani
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    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.

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    File URL: http://fic.wharton.upenn.edu/fic/papers/96/9653.pdf
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    Paper provided by Wharton School Center for Financial Institutions, University of Pennsylvania in its series Center for Financial Institutions Working Papers with number 96-53.

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    Date of creation: Nov 1996
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    Handle: RePEc:wop:pennin:96-53
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