Derivative activities and the risk of international banks: A market index and VaR approach

The results of a comparison of international banks using a three-factor multi-index model and a modified value-at-risk (VaR) analysis indicate that the use of options increases the interest rate beta for all banks, while both interest rate and currency swaps generally reduce risk. The results are th...

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Bibliographic Details
Published inInternational review of financial analysis Vol. 12; no. 5; pp. 489 - 511
Main Authors Reichert, Alan, Shyu, Yih-Wen
Format Journal Article
LanguageEnglish
Published Elsevier Inc 2003
Subjects
Derivatives
International banks
Risk management
Swaps
Swaps
Derivatives
International banks
Risk management
G21
F33
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Summary:The results of a comparison of international banks using a three-factor multi-index model and a modified value-at-risk (VaR) analysis indicate that the use of options increases the interest rate beta for all banks, while both interest rate and currency swaps generally reduce risk. The results are the strongest and the most consistent for U.S. dealer banks, followed by European banks, and then Japanese banks. Furthermore, the evidence suggests that the VaR approach to risk management can effectively be used by both domestic as well as international banks, although the results appear to be somewhat sensitive to the regulatory environment in which the bank operates.
ISSN:1057-5219
1873-8079
DOI:10.1016/S1057-5219(03)00061-9