Disclosed Derivatives Usage, Securitization, and the Systemic Equity Risk of Banks

Northern Finance Association Conference 2014

70 Pages Posted: 6 May 2014

See all articles by Rouven Trapp

Rouven Trapp

Ulm University - Faculty of Mathematics and Economics

Gregor N. F. Weiss

University of Leipzig - Faculty of Economics and Management Science

Date Written: May 6, 2014

Abstract

We show that the information on derivatives usage and securitization activities of U.S. banks as disclosed in their pre-crisis 10-K filings predicts their systemic equity risk during the financial crisis. Investors predominantly exited stocks of banks that had previously disclosed a more extensive use of financial derivatives and loan securitization. Our findings are consistent with the hypothesis that derivatives usage for non-hedging purposes increases both firm and systemic risk. Moreover, banks which disclosed significant securitization activities and were thus potentially exposed to under-capitalized risks from conduits possess a higher vulnerability of their equity to market downturns.

Keywords: Financial Crisis, Systemic Equity Risk, Derivatives, Securitization, Risk Management

JEL Classification: G32, M40, G01

Suggested Citation

Trapp, Rouven and Weiss, Gregor N. F., Disclosed Derivatives Usage, Securitization, and the Systemic Equity Risk of Banks (May 6, 2014). Northern Finance Association Conference 2014, Available at SSRN: https://ssrn.com/abstract=2433418

Rouven Trapp

Ulm University - Faculty of Mathematics and Economics

Helmholtzstraße 18
Ulm, 89081
Germany

Gregor N. F. Weiss (Contact Author)

University of Leipzig - Faculty of Economics and Management Science ( email )

Grimmaische Str. 12
Leipzig, 04109
Germany
+49 341 97 33821 (Phone)
+49 341 97 33829 (Fax)

HOME PAGE: http://www.wifa.uni-leipzig.de/nfdl

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