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Decomposing Large Banks’ Systemic Trading Losses

Author

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  • Radoslav Raykov
Abstract
Do banks realize simultaneous trading losses because they invest in the same assets, or because different assets are subject to the same macro shocks? This paper decomposes the comovements of bank trading losses into two orthogonal channels: portfolio overlap and common shocks. While portfolio overlap generates strong comovements, I find that the sensitivity to common shocks from non-overlapping assets is larger. This sensitivity operates through two sub-channels: the short-long interest rate correlation and the stock-bond correlation, driven by macroeconomic factors. This reveals a new trade-off whereby reductions in portfolio overlap can increase the comovement of trading losses by adding exposures to macro shocks.

Suggested Citation

  • Radoslav Raykov, 2024. "Decomposing Large Banks’ Systemic Trading Losses," Staff Working Papers 24-6, Bank of Canada.
    • Handle: RePEc:bca:bocawp:24-6
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    References listed on IDEAS

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    More about this item

    Keywords

    Financial institutions; Financial stability;

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G20 - Financial Economics - - Financial Institutions and Services - - - General

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