Risk Management with Derivatives by Dealers and Market Quality in Government Bond Markets
51 Pages Posted: 7 Nov 2008 Last revised: 9 Nov 2020
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Risk Management with Derivatives by Dealers and Market Quality in Government Bond Markets
Risk Management with Derivatives by Dealers and Market Quality in Government Bond Markets
Risk Management with Derivatives by Dealers and Market Quality in Government Bond Markets
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).
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