Risk Management with Derivatives by Dealers and Market Quality in Government Bond Markets

51 Pages Posted: 7 Nov 2008 Last revised: 9 Nov 2020

See all articles by Narayan Y. Naik

Narayan Y. Naik

London Business School - Institute of Finance and Accounting

Pradeep K. Yadav

University of Oklahoma Price College of Business

Multiple version iconThere are 4 versions of this paper

Date Written: September 1, 2001

Abstract


This paper investigates how bond dealers manage core business risk with in-terest rate futures and the extent to which market quality is a¡ected by their selective risk taking. We observe that dealers use futures to take directional bets and hedge changes in their spot exposure.We ¢nd that, cross-sectionally, a dealer with longer (shorter) risk exposure sells (buys) a larger amount of ex-posure the next day. However, this risk control takes place via the futures mar-ket and not the spot market. Finally, we ¢nd strong support for the price e¡ects of capital constraints emphasized by Froot and Stein (1998).

Suggested Citation

Naik, Narayan Y. and Yadav, Pradeep K., Risk Management with Derivatives by Dealers and Market Quality in Government Bond Markets (September 1, 2001). Journal of Finance, Vol. 58, No. 5, 2003, Available at SSRN: https://ssrn.com/abstract=1297050

Narayan Y. Naik (Contact Author)

London Business School - Institute of Finance and Accounting ( email )

Sussex Place
Regent's Park
London NW1 4SA
United Kingdom
+44 20 70008223 (Phone)

Pradeep K. Yadav

University of Oklahoma Price College of Business ( email )

307 W.Brooks, Room 3270 Division of Finance
Norman, OK 73019
United States
4053255591 (Phone)
4053255491 (Fax)

HOME PAGE: http://www.ou.edu/price/finance/faculty/pradeep_yadav.html