Chapter

Estimating Bank Trading Risk

James O̓Brien and Jeremy Berkowitz

in The Risks of Financial Institutions

Published by University of Chicago Press

Published in print February 2007 | ISBN: 9780226092850
Published online February 2013 | e-ISBN: 9780226092980 | DOI: http://dx.doi.org/10.7208/chicago/9780226092980.003.0003
Estimating Bank Trading Risk

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This chapter evaluates bank dealers' exposures to exchange rate, interest rate, equity, and credit market factors. The results from the random coefficient model do not show that bank dealers take large market risks relative to the size of average trading revenues and trading revenue volatility, and there is significant cross-dealer heterogeneity in exposures. For the noninterest rate factors, the data do not demonstrate any covariation between the factor exposures and the factors that are common among the dealers. The results from the two-factor model approaches indicate that, in the aggregate, bank dealers are not consistently on one side of the market, except possibly for (default-free) interest rate exposures. Heterogeneity in dealers' market exposures decreases the likelihood that dealers as a group will incur large losses in periods of market stress or that their aggregate risk-taking behavior contributes significantly to a herding phenomenon.

Keywords: bank dealers; exchange rate; interest rate; equity; credit market; trading revenues; herding

Chapter.  15948 words.  Illustrated.

Subjects: Financial Markets

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