Online from: 1975
Subject Area: Accounting and Finance
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|Title:||Systemic risk and competition in OTC derivatives dealing: evidence from client failures|
|Author(s):||Ekaterina E. Emm, (Albers School of Business and Economics, Seattle University, Seattle, Washington, USA), Ufuk Ince, (School of Business, Pacific Lutheran University, Tacoma, Washington, USA)|
|Citation:||Ekaterina E. Emm, Ufuk Ince, (2011) "Systemic risk and competition in OTC derivatives dealing: evidence from client failures", Managerial Finance, Vol. 37 Iss: 12, pp.1161 - 1189|
|Keywords:||Dealers, Derivative markets, Loss, OTC derivatives, Securities, Systemic risk, United States of America|
|Article type:||Research paper|
|DOI:||10.1108/03074351111175083 (Permanent URL)|
|Publisher:||Emerald Group Publishing Limited|
|Acknowledgements:||JEL classification – G24, G14, G38. The authors are grateful for insights and comments from Bonnie Buchanan, Mark Carhill, Gerald Gay, Steven Holland, Özgür Ince, Patricia Kelley, and Stephen D. Smith, as well as from seminar participants at the Federal Reserve Bank of Atlanta in 2007, and the 2007 Financial Management Association Meetings. The usual disclaimer applies.|
Purpose – The purpose of this paper is to examine the extent of systemic risk and competition in over-the-counter (OTC) derivatives dealing. Using derivatives-related failures during the 1990s, the authors draw conclusions that are pertinent to the recent financial market turmoil involving OTC derivatives.
Design/methodology/approach – The authors use the event-study methodology with crude dependence adjustment to examine the wealth effect for the involved derivatives dealers. The authors re-estimate the parameters using the market-adjusted model to check for robustness. In addition, a multivariable regression framework was used to estimate the determinants of the abnormal returns.
Findings – OTC derivatives dealers experience negative returns when their clients announce derivatives losses. In contrast, rival dealers uninvolved in the loss event exhibit positive returns. The extent of the positive returns for the rival dealers grows as new events unfold, and the dealers continue to steer clear of derivatives trouble. A broader industry portfolio of securities brokers, dealers, and advisors is affected negatively, indicating possible industry contagion. The cross-sectional analysis of the abnormal returns indicates the presence of information (and not pure) contagion implying that in a financial crisis involving derivatives systemic failure is not likely.
Originality/value – The authors extend the literature by examining an exhaustive set of derivatives loss events. The sample includes a more diverse set of derivatives dealers and it spans a longer time period than prior studies did. This is also the first study confirming the distorting impact of the “too big to fail” and “federal safety net” phenomena in the context of OTC derivatives dealing.
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