Are derivatives dangerous?

Gunther Capelle-Blancard

Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) from HAL

Abstract: Since the 1970s, the financial system has undergone deep structural changes. Innovation has been a key driver of these changes and most economists acknowledge that the impact has been positive overall. However, each time a financial crisis arises, the debate is on. Derivatives especially, which are among the major innovations in the past thirty years, cause deep concerns. In this paper, we propose a survey of the academic literature that has addressed the threats posed by derivatives. An initial issue is the impact of derivatives on the volatility of the underlying assets, but empirical findings do not suggest any significant effect. The recent literature on the dangers of derivatives is more concerned by systemic risks. Several studies suggest that the sophistication of the products and the concentration of risks are potential sources of instability because of the increasing uncertainty, the repeated occurrence of extreme losses, and finally the greater possibility of global crisis. Among the solutions that have been proposed to mitigate risk, beyond strengthening internal control, putting clearinghouses into general use and limiting naked-transactions seem to be the most promising avenues.

Keywords: Derivatives; forwards; futures; financial innovation; speculation; OTC markets; financial instability; Marchés dérivés; contrats à terme; options; innovation financière; spéculation déstabilisante; marchés de gré à gré; instabilité financière (search for similar items in EconPapers)
Date: 2010
Note: View the original document on HAL open archive server: https://shs.hal.science/halshs-00605908
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Citations: View citations in EconPapers (3)

Published in 2010, pp.1-33

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Working Paper: Are derivatives dangerous? (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:hal:cesptp:halshs-00605908

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