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The Risks of Financial Institutions$
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Mark Carey and Rene M. Stulz

Print publication date: 2007

Print ISBN-13: 9780226092850

Published to Chicago Scholarship Online: February 2013

DOI: 10.7208/chicago/9780226092980.001.0001

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PRINTED FROM CHICAGO SCHOLARSHIP ONLINE (www.chicago.universitypressscholarship.com). (c) Copyright University of Chicago Press, 2021. All Rights Reserved. An individual user may print out a PDF of a single chapter of a monograph in CHSO for personal use.date: 17 September 2021

Estimating Bank Trading Risk

Estimating Bank Trading Risk

A Factor Model Approach

Chapter:
(p.59) 2 Estimating Bank Trading Risk
Source:
The Risks of Financial Institutions
Author(s):

James O̓Brien

Jeremy Berkowitz

Publisher:
University of Chicago Press
DOI:10.7208/chicago/9780226092980.003.0003

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

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