Post by Sapphire Capital on Aug 21, 2008 22:26:50 GMT 4
How Do Banks Manage Interest Rate Risk: Hedge or Bet?
Luís Vasco Pinheiro
ISCTE
Miguel A. Ferreira
ISCTE Business School, Lisbon
June 30, 2008
Abstract:
Given the importance of interest rates risk in the banking industry, we study the success of banks interest rate hedging practices from 1980-2003. Using a sample of 371 banks, we investigate how well managers forecast interest rate movements by managing their own duration gaps. We also extend Flannery et al. (1984) factor model and recommend additional factors (slope, credit spread, foreign exchange and convexity) to explain bank stock returns. The major finding is that on average managers are not good forecasters. This result suggests that the majority of banks should focus more on the core business (loans and deposits) instead of viewing the asset and liability management as a profit center.
papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID1157672_code929418.pdf?abstractid=1157672&mirid=3
Luís Vasco Pinheiro
ISCTE
Miguel A. Ferreira
ISCTE Business School, Lisbon
June 30, 2008
Abstract:
Given the importance of interest rates risk in the banking industry, we study the success of banks interest rate hedging practices from 1980-2003. Using a sample of 371 banks, we investigate how well managers forecast interest rate movements by managing their own duration gaps. We also extend Flannery et al. (1984) factor model and recommend additional factors (slope, credit spread, foreign exchange and convexity) to explain bank stock returns. The major finding is that on average managers are not good forecasters. This result suggests that the majority of banks should focus more on the core business (loans and deposits) instead of viewing the asset and liability management as a profit center.
papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID1157672_code929418.pdf?abstractid=1157672&mirid=3