In a recent study, CFTC economists found that "intermediary risk appetite plays an important role in the availability of dealer hedging services provided to real economy firms."
The economists, Scott Mixon and Esen Onur, evaluated the impact of financial intermediaries (in particular, swap dealers) in asset pricing by assessing how swap dealers' risk appetite affects how they address client demand for derivatives exposure. The economists used West Texas Intermediate crude oil derivatives for their empirical analysis in order to evaluate the behavior of swap dealers. The authors also noted the "basis risk" that dealers face in entering bespoke hedging contracts with customers while hedging the risks of those contracts through standardized, liquid positions (e.g., cleared products).
The economists found "strong evidence" connecting swap dealers' risk appetite with providing dealing services to customers as well as for hedging decisions of real economy firms.
Originally published May 14, 2020.
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