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
The Internet of Things can drive efficiency for airlines and airports. In their session at @ThingsExpo, Shyam Varan Nath, Principal Architect with GE, and Sudip Majumder, senior director of development at Oracle, discussed the technical details of the connected airline baggage and related social media solutions. These IoT applications will enhance travelers' journey experience and drive efficiency for the airlines and the airports.
SYS-CON Events announced today that WineSOFT will exhibit at SYS-CON's 20th International Cloud Expo®, which will take place on June 6-8, 2017, at the Javits Center in New York City, NY. Based in Seoul and Irvine, WineSOFT is an innovative software house focusing on internet infrastructure solutions. The venture started as a bootstrap start-up in 2010 by focusing on making the internet faster and more powerful. WineSOFT’s knowledge is based on the expertise of TCP/IP, VPN, SSL, peer-to-peer, mob...
DevOps is being widely accepted (if not fully adopted) as essential in enterprise IT. But as Enterprise DevOps gains maturity, expands scope, and increases velocity, the need for data-driven decisions across teams becomes more acute. DevOps teams in any modern business must wrangle the ‘digital exhaust’ from the delivery toolchain, "pervasive" and "cognitive" computing, APIs and services, mobile devices and applications, the Internet of Things, and now even blockchain.
A strange thing is happening along the way to the Internet of Things, namely far too many devices to work with and manage. It has become clear that we'll need much higher efficiency user experiences that can allow us to more easily and scalably work with the thousands of devices that will soon be in each of our lives. Enter the conversational interface revolution, combining bots we can literally talk with, gesture to, and even direct with our thoughts, with embedded artificial intelligence, whic...
Have you ever noticed how some IT people seem to lead successful, rewarding, and satisfying lives and careers, while others struggle? IT author and speaker Don Crawley uncovered the five principles that successful IT people use to build satisfying lives and careers and he shares them in this fast-paced, thought-provoking webinar. You'll learn the importance of striking a balance with technical skills and people skills, challenge your pre-existing ideas about IT customer service, and gain new in...
WebRTC sits at the intersection between VoIP and the Web. As such, it poses some interesting challenges for those developing services on top of it, but also for those who need to test and monitor these services. In his session at WebRTC Summit, Tsahi Levent-Levi, co-founder of testRTC, reviewed the various challenges posed by WebRTC when it comes to testing and monitoring and on ways to overcome them.
SYS-CON Events announced today that Catchpoint Systems, Inc., a provider of innovative web and infrastructure monitoring solutions, has been named “Silver Sponsor” of SYS-CON's DevOps Summit at 18th Cloud Expo New York, which will take place June 7-9, 2016, at the Javits Center in New York City, NY. Catchpoint is a leading Digital Performance Analytics company that provides unparalleled insight into customer-critical services to help consistently deliver an amazing customer experience. Designed ...
SYS-CON Events announced today that CA Technologies has been named “Platinum Sponsor” of SYS-CON's 20th International Cloud Expo®, which will take place on June 6-8, 2017, at the Javits Center in New York City, NY, and the 21st International Cloud Expo®, which will take place October 31-November 2, 2017, at the Santa Clara Convention Center in Santa Clara, CA. CA Technologies helps customers succeed in a future where every business – from apparel to energy – is being rewritten by software. From ...
Tintri VM-aware storage is the simplest for virtualized applications and cloud. Organizations including GE, Toyota, United Healthcare, NASA and 6 of the Fortune 15 have said "No to LUNs." With Tintri they manage only virtual machines, in a fraction of the footprint and at far lower cost than conventional storage. Tintri offers the choice of all-flash or hybrid-flash platform, converged or stand-alone structure and any hypervisor. Rather than obsess with storage, leaders focus on the business app...
The financial services market is one of the most data-driven industries in the world, yet it’s bogged down by legacy CPU technologies that simply can’t keep up with the task of querying and visualizing billions of records. In his session at 20th Cloud Expo, Jared Parker, Director of Financial Services at Kinetica, will discuss how the advent of advanced in-database analytics on the GPU makes it possible to run sophisticated data science workloads on the same database that is housing the rich inf...
DevOps is often described as a combination of technology and culture. Without both, DevOps isn't complete. However, applying the culture to outdated technology is a recipe for disaster; as response times grow and connections between teams are delayed by technology, the culture will die. A Nutanix Enterprise Cloud has many benefits that provide the needed base for a true DevOps paradigm.
Ayehu provides IT Process Automation & Orchestration solutions for IT and Security professionals to identify and resolve critical incidents and enable rapid containment, eradication, and recovery from cyber security breaches. Ayehu provides customers greater control over IT infrastructure through automation. Ayehu solutions have been deployed by major enterprises worldwide, and currently, support thousands of IT processes across the globe. The company has offices in New York, California, and Isr...
LogMeIn has completed its previously disclosed merger with Citrix Systems, Inc.’s GetGo, Inc. subsidiary, a wholly owned subsidiary consisting of Citrix’s GoTo family of service offerings. The merger officially closed after market hours on January 31, 2017. Effected through a Reverse Morris Trust transaction, the merger brings together two of the preeminent players in cloud connectivity to instantly create one of the world’s top 10 public SaaS companies, and a market leader with the scale, resou...
In his session at @ThingsExpo, Steve Wilkes, CTO and founder of Striim, will delve into four enterprise-scale, business-critical case studies where streaming analytics serves as the key to enabling real-time data integration and right-time insights in hybrid cloud, IoT, and fog computing environments. As part of this discussion, he will also present a demo based on its partnership with Fujitsu, highlighting their technologies in a healthcare IoT use-case. The demo showcases the tracking of patie...
In his keynote at 18th Cloud Expo, Andrew Keys, Co-Founder of ConsenSys Enterprise, provided an overview of the evolution of the Internet and the Database and the future of their combination – the Blockchain. Andrew Keys is Co-Founder of ConsenSys Enterprise. He comes to ConsenSys Enterprise with capital markets, technology and entrepreneurial experience. Previously, he worked for UBS investment bank in equities analysis. Later, he was responsible for the creation and distribution of life settle...