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

Our approach is motivated by the statistical finding that the market value of fixed income instruments exhibit a low-dimensional factor structure. Indeed, a large literature has documented that the prices of many types of bonds comove strongly, and that these common movements are summarized by a small number of factors. It follows that for any fixed income position, there is a portfolio in a few bonds that approximately replicates how the value of the position changes with innovations to the factors. For loans and securities, the replication portfolio is derived from detailed information on the maturity distribution provided by the call reports. For loans reported at book value,. | Wharton Financial Institutions Center Derivative Exposure and the Interest Rate and Exchange Rate Risks of . Banks by Jongmoo Jay Choi Elyas Elyasiani 96-53 The Wharton School University of Pennsylvania THE WHARTON FINANCIAL INSTITUTIONS CENTER The Wharton Financial Institutions Center provides a multi-disciplinary research approach to the problems and opportunities facing the financial services industry in its search for competitive excellence. The Center s research focuses on the issues related to managing risk at the firm level as well as ways to improve productivity and performance. The Center fosters the development of a community of faculty visiting scholars and . candidates whose research interests complement and support the mission of the Center. The Center works closely with industry executives and practitioners to ensure that its research is informed by the operating realities and competitive demands facing industry participants as they pursue competitive excellence. Copies of the working papers summarized here are available from the Center. If you would like to learn more about the Center or become a member of our research community please let us know of your interest. Anthony M. Santomero Director The Working Paper Series is made possible by a generous grant from the Alfred P. Sloan f oundalion Derivative Exposure and the Interest Rate and Exchange Rate Risks of . Banks 1 November 1996 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 .

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