The Impact Of Interest Rates Swap Activity On Bank's Stock Volatility: An Empirical Portfolio Approach

In the last ten to fifteen years, financial derivative securities have become important and controversial products. These securities are powerful instruments for transferring and hedging risk. However, they also allow agents to quickly and cheaply take speculative risk. Determining whether agents are hedging or speculating is not a simple matter because it is difficult to value portfolios of derivatives. The Relationship between risk and derivatives is especially important in banking since banks dominate most dérivatives markets and, within banking, derivative holdings are concentrated at a few large banks. If large banks are using derivatives to increase risk, then losses on derivatives, such as those of Procter and Gamble, and Orange County, may seem small in comparison with the losses by banks (Barings, AIB, AIG, Lehman Brothers). In addition, the major banks are all taking similar gambles, then the banking system is becoming the most vulnerable sector since the lasting financial crisis that started in 2009.