TY  - JOUR
AU  - O'Brien, James
AU  - Berkowitz, Jeremy
TI  - Estimating Bank Trading Risk: A Factor Model Approach
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 11608
PY  - 2005
Y2  - September 2005
DO  - 10.3386/w11608
UR  - http://www.nber.org/papers/w11608
L1  - http://www.nber.org/papers/w11608.pdf
N1  - Author contact info:
James M. O'Brien
Federal Reserve Board of Governors

Jeremy Berkowitz
University of Houston
Department of Finance
334 Melcher Hall
Houston, TX 77204-6021
E-Mail: jberkowitz@uh.edu
M1  - published as James M. O'Brien, Jeremy Berkowitz. "Estimating Bank Trading Risk. A Factor Model Approach," in Mark Carey and René M. Stulz, editors, "The Risks of Financial Institutions" University of Chicago Press (2006)

AB  - Risk in bank trading portfolios and its management are potentially important to the banks%u2019 soundness and to the functioning of securities and derivatives markets. In this paper, proprietary daily trading revenues of 6 large dealer banks are used to study the bank dealers%u2019 market risks using a market factor model approach. Dealers%u2019 exposures to exchange rate, interest rate, equity, and credit market factors are estimated. A factor model framework for variable exposures is presented and two modeling approaches are used: a random coefficient model and rolling factor regressions. The results indicate small average market exposures with significant but relatively moderate variation in exposures over time. Except for interest rates, there is heterogeneity in market exposures across the dealers. For interest rates, the dealers have small average long exposures and exposures vary inversely with the level of rates. Implications for aggregate bank dealer risk and market stability issues are discussed.
ER  -