Hedging, market concentration and monetary policy: a joint analysis of gilt and derivatives exposures

Gabor Pinter and Danny Walker ()
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Danny Walker: Bank of England, Postal: Bank of England, Threadneedle Street, London, EC2R 8AH

No 1032, Bank of England working papers from Bank of England

Abstract: We use granular data sets – merged across the UK government bond, interest rate swap, options and futures markets – to estimate exposures to interest rate risk at the sector level and for individual funds within the same sector. We focus on non-bank financial intermediaries (NBFIs) such as insurance companies, pension funds, asset managers and hedge funds. We find that NBFIs tend to use derivatives to amplify bond market exposures to interest rate risk, rather than to hedge them. Moreover, interest rate derivatives usage is highly concentrated among a few investors, which could increase the aggregate consequences of idiosyncratic shocks to these investors. We show that this market concentration impedes the monetary policy transmission to asset prices. We also find that monetary policy loosening (tightening) causes NBFIs to take on more (less) interest rate risk via derivatives, consistent with the risk-taking channel of monetary policy.

Keywords: Interest rate risk; hedging; swaps; options; gilts; futures; NBFI (search for similar items in EconPapers)
JEL-codes: D40 E50 E52 G10 G20 G23 (search for similar items in EconPapers)
Pages: 55 pages
Date: 2023-07-21
New Economics Papers: this item is included in nep-cba, nep-ger, nep-ifn and nep-mon
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:boe:boeewp:1032

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