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Financial derivatives, opacity, and crash risk: Evidence from large US banks

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  • Dewally, Michaël
  • Shao, Yingying

Abstract

We test how the use of financial derivatives affects banks’ informational structure and future stock performance based on a sample of large bank holding companies in the US. Using banks’ use of financial derivatives as a proxy for opacity, we find that high level use of interest rate and foreign exchange derivatives are associated with an increase in the synchronicity (R2) of stock price movements with the market index, which indicates less revelation of bank-specific information to the market. This finding is consistent with the prediction of the model developed by Wagner (2007). We document that superior corporate governance tempers these effects. Finally, we find that an increase in the opacity is significantly and positively related to an increase in banks’ future stock price crash risk.

Suggested Citation

  • Dewally, Michaël & Shao, Yingying, 2013. "Financial derivatives, opacity, and crash risk: Evidence from large US banks," Journal of Financial Stability, Elsevier, vol. 9(4), pages 565-577.
    • Handle: RePEc:eee:finsta:v:9:y:2013:i:4:p:565-577
    DOI: 10.1016/j.jfs.2012.11.001
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    More about this item

    Keywords

    Opacity; Hedging; Market synchronicity; Crash risk; Corporate governance;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • D89 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Other

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