Welcome!

News Feed Item

Derivatives Can Be Good for Growth, Says New Milken Institute Study

LOS ANGELES, CA -- (Marketwired) -- 03/26/14 -- A new study by the Milken Institute shows the benefits to the wider economy from the use of financial derivatives. "Deriving the Economic Impact of Derivatives: Growth Through Risk Management" is a first-of-its-kind study of derivatives' quantitative impact on economic growth; it charts the positive effects in the U.S. economy from their use, both in the financial and non-financial sectors.

The study found that:

  • Banks' use of derivatives, by permitting greater extension of credit to the private sector, combined with the use of derivatives by non-financial firms, expanded U.S. real GDP for about $3.7 billion each quarter from 2003 to 2012.
  • The total increase in economic activity was 1.1 percent ($149.5 billion) between 2003 and 2012.
  • By the end of 2012, employment had been boosted in these years by 530,400 (0.6 percent) and industrial production 2.1 percent, due to the use of derivatives.

"When properly used, many derivative products can mitigate the escalation of uncertainty that can freeze investment or hiring plans," says Ross DeVol, chief research officer at the Institute. "The statistical evidence supporting derivatives' ability to promote growth is overwhelming."

To understand the study's findings, it is important to understand how they were derived. The use of derivatives by banks and non-financial firms has an indirect impact on economic growth via multiple channels. To gauge the overall impact, the analysis is divided into two steps. First, researchers estimated the influence of banks' use of derivatives in lending and also the effects stemming from their use by non-financial firms on the value of those firms. Second, researchers linked these results to the economy overall.

Although derivatives influence the U.S. economy in several ways, the Milken Institute research focuses especially on credit extension and firm value. The Institute's statistical analysis demonstrates that the use of derivatives by banks allows for a larger volume of commercial and industrial loans, increasing business investment. It also confirms that investors assign higher valuations to non-financial firms that use derivative products -- valuations that boost their willingness and ability to expand operations.

The report points out that trading of derivatives takes place in two types of markets: organized exchanges and over the counter. Exchange-traded derivatives employ a clearinghouse that serves as a counterparty. Derivatives traded through the OTC market are privately negotiated and customized to the specifications of the counterparties involved.

Many mistakenly fault derivatives for the disruptions that were in fact caused by overleverage. For example, the U.S. Financial Crisis Inquiry Commission (FCIC) identified credit default swaps, an OTC derivative, as one of eight major factors that contributed to the financial crisis. One principal factor identified by the FCIC was leverage -- the use of borrowed funds for making investments -- that permeated the financial system.

The outlook for derivatives is veiled by regulatory changes taking place in the United States and other major markets, conclude the authors of the new study. But the past suggests that derivatives will continue to play a key role in finance; their continued contribution to economic growth will depend on the markets becoming more transparent and liquid, enabling end users to generate competitive returns while effectively hedging risk.

"Deriving the Economic Impact of Derivatives: Growth Through Risk Management," is by Apanard (Penny) Prabha, Keith Savard and Heather Wickramarachi, with project direction from Ross DeVol and Perry Wong. This research was supported, in part, by CME Group. The report is available for download at no charge at http://www.milkeninstitute.org/publications/publications.taf?function=detail&ID=38801468&cat=resrep.

About the Milken Institute
A nonprofit, nonpartisan think tank, the Milken Institute believes in the power of capital markets to solve urgent social and economic challenges. Its mission is to improve lives around the world by advancing innovative economic and policy solutions that create jobs, widen access to capital and enhance health.
www.milkeninstitute.org
@milkeninstitute

Add to Digg Bookmark with del.icio.us Add to Newsvine

More Stories By Marketwired .

Copyright © 2009 Marketwired. All rights reserved. All the news releases provided by Marketwired are copyrighted. Any forms of copying other than an individual user's personal reference without express written permission is prohibited. Further distribution of these materials is strictly forbidden, including but not limited to, posting, emailing, faxing, archiving in a public database, redistributing via a computer network or in a printed form.

Latest Stories
Multiple data types are pouring into IoT deployments. Data is coming in small packages as well as enormous files and data streams of many sizes. Widespread use of mobile devices adds to the total. In this power panel at @ThingsExpo, moderated by Conference Chair Roger Strukhoff, panelists looked at the tools and environments that are being put to use in IoT deployments, as well as the team skills a modern enterprise IT shop needs to keep things running, get a handle on all this data, and deliver...
After more than five years of DevOps, definitions are evolving, boundaries are expanding, ‘unicorns’ are no longer rare, enterprises are on board, and pundits are moving on. Can we now look at an evolution of DevOps? Should we? Is the foundation of DevOps ‘done’, or is there still too much left to do? What is mature, and what is still missing? What does the next 5 years of DevOps look like? In this Power Panel at DevOps Summit, moderated by DevOps Summit Conference Chair Andi Mann, panelists loo...
In his session at @ThingsExpo, Eric Lachapelle, CEO of the Professional Evaluation and Certification Board (PECB), provided an overview of various initiatives to certify the security of connected devices and future trends in ensuring public trust of IoT. Eric Lachapelle is the Chief Executive Officer of the Professional Evaluation and Certification Board (PECB), an international certification body. His role is to help companies and individuals to achieve professional, accredited and worldwide re...
While DevOps most critically and famously fosters collaboration, communication, and integration through cultural change, culture is more of an output than an input. In order to actively drive cultural evolution, organizations must make substantial organizational and process changes, and adopt new technologies, to encourage a DevOps culture. Moderated by Andi Mann, panelists discussed how to balance these three pillars of DevOps, where to focus attention (and resources), where organizations might...
Amazon started as an online bookseller 20 years ago. Since then, it has evolved into a technology juggernaut that has disrupted multiple markets and industries and touches many aspects of our lives. It is a relentless technology and business model innovator driving disruption throughout numerous ecosystems. Amazon’s AWS revenues alone are approaching $16B a year making it one of the largest IT companies in the world. With dominant offerings in Cloud, IoT, eCommerce, Big Data, AI, Digital Assista...
New competitors, disruptive technologies, and growing expectations are pushing every business to both adopt and deliver new digital services. This ‘Digital Transformation’ demands rapid delivery and continuous iteration of new competitive services via multiple channels, which in turn demands new service delivery techniques – including DevOps. In this power panel at @DevOpsSummit 20th Cloud Expo, moderated by DevOps Conference Co-Chair Andi Mann, panelists examined how DevOps helps to meet the de...
Both SaaS vendors and SaaS buyers are going “all-in” to hyperscale IaaS platforms such as AWS, which is disrupting the SaaS value proposition. Why should the enterprise SaaS consumer pay for the SaaS service if their data is resident in adjacent AWS S3 buckets? If both SaaS sellers and buyers are using the same cloud tools, automation and pay-per-transaction model offered by IaaS platforms, then why not host the “shrink-wrapped” software in the customers’ cloud? Further, serverless computing, cl...
You know you need the cloud, but you’re hesitant to simply dump everything at Amazon since you know that not all workloads are suitable for cloud. You know that you want the kind of ease of use and scalability that you get with public cloud, but your applications are architected in a way that makes the public cloud a non-starter. You’re looking at private cloud solutions based on hyperconverged infrastructure, but you’re concerned with the limits inherent in those technologies.
The taxi industry never saw Uber coming. Startups are a threat to incumbents like never before, and a major enabler for startups is that they are instantly “cloud ready.” If innovation moves at the pace of IT, then your company is in trouble. Why? Because your data center will not keep up with frenetic pace AWS, Microsoft and Google are rolling out new capabilities. In his session at 20th Cloud Expo, Don Browning, VP of Cloud Architecture at Turner, posited that disruption is inevitable for comp...
No hype cycles or predictions of zillions of things here. IoT is big. You get it. You know your business and have great ideas for a business transformation strategy. What comes next? Time to make it happen. In his session at @ThingsExpo, Jay Mason, Associate Partner at M&S Consulting, presented a step-by-step plan to develop your technology implementation strategy. He discussed the evaluation of communication standards and IoT messaging protocols, data analytics considerations, edge-to-cloud tec...
"When we talk about cloud without compromise what we're talking about is that when people think about 'I need the flexibility of the cloud' - it's the ability to create applications and run them in a cloud environment that's far more flexible,” explained Matthew Finnie, CTO of Interoute, in this SYS-CON.tv interview at 20th Cloud Expo, held June 6-8, 2017, at the Javits Center in New York City, NY.
IoT solutions exploit operational data generated by Internet-connected smart “things” for the purpose of gaining operational insight and producing “better outcomes” (for example, create new business models, eliminate unscheduled maintenance, etc.). The explosive proliferation of IoT solutions will result in an exponential growth in the volume of IoT data, precipitating significant Information Governance issues: who owns the IoT data, what are the rights/duties of IoT solutions adopters towards t...
Wooed by the promise of faster innovation, lower TCO, and greater agility, businesses of every shape and size have embraced the cloud at every layer of the IT stack – from apps to file sharing to infrastructure. The typical organization currently uses more than a dozen sanctioned cloud apps and will shift more than half of all workloads to the cloud by 2018. Such cloud investments have delivered measurable benefits. But they’ve also resulted in some unintended side-effects: complexity and risk. ...
It is ironic, but perhaps not unexpected, that many organizations who want the benefits of using an Agile approach to deliver software use a waterfall approach to adopting Agile practices: they form plans, they set milestones, and they measure progress by how many teams they have engaged. Old habits die hard, but like most waterfall software projects, most waterfall-style Agile adoption efforts fail to produce the results desired. The problem is that to get the results they want, they have to ch...
With the introduction of IoT and Smart Living in every aspect of our lives, one question has become relevant: What are the security implications? To answer this, first we have to look and explore the security models of the technologies that IoT is founded upon. In his session at @ThingsExpo, Nevi Kaja, a Research Engineer at Ford Motor Company, discussed some of the security challenges of the IoT infrastructure and related how these aspects impact Smart Living. The material was delivered interac...