The Use of Financial Derivatives and Risks of U.S. Bank.pdfVIP

30 July 2014 The Use of Financial Derivatives and Risks of U.S. Bank Holding Companies* Shaofang Li** University of Ljubljana Matej Marin膷*** University of Ljubljana and University of Amsterdam Abstract This article examines the impact of financial derivatives on systematic risk of publicly listed U.S. bank holding companies (BHCs) from 1997 to 2012. We find that the use of financial derivatives is positively and significantly related to BHCs鈥 systematic risk exposures. Higher use of interest rate derivatives, exchange rate derivatives, and credit derivatives corresponds to greater systematic interest rate risk, exchange rate risk, and credit risk. The positive relationship between derivatives and risks persists for derivatives for trading as well as for derivatives for hedging. We also analyze the role of BHCs鈥 size and capital and the impact of the global financial crisis on the relationship between derivatives and risks. Keywords: Financial Derivatives, Interest Rate Derivatives, Exchange Rate Derivatives, Credit Derivatives, Systematic Risk JEL codes: G20, G21, G28 ____________________________ * The authors would like to thank the editor Brian Lucey, two anonymous referees, Giuseppe Galloppo, Iftekhar Hasan, Joon Ho Hwang, Marko Ko拧ak, Igor Lon膷arski, Nadia Massoud, Thu Hang Nguyen, and Min-Teh Yu, and the participants at the Midwest Finance Association Conferen