THE ROLE OF DERIVATIVE INSTRUMENTS IN FINANCIAL STABILITY

Abstract

  Globalization offers new challenges to the world econ- omy, which becomes more depended on unprecedented in- crease of financial activity worldwide. Availability of informa- tion and development of technologies significantly increased capital flow in the world and role of capital and monetary markets in economy.
  Second half of 2007 and first half of 2008 faced import- ant events in the world economy. Among them especially no- table are US real estate crisis and global limitation of credits, devaluation of USD and strengthening of inflation processes. These global events have significant influence over financial stability.
  In the recent decade variability of stocks and interest rates, together with globalization of capital markets, in- creased demand on financial instruments with the purpose of distribution of risks. From this perspective, interest rate derivatives are most frequently marketed among OCT deriv- atives.
  Therefore, estimation of the role of financial derivatives instruments is very important in stability of international financial system. Purpose of research is to analyze influence of derivatives over financial crisis. Within frameworks of re- search 5 countries are studied for 1997-2010 quarterly. OLS regressive equation is used in research for empirical tests. Model includes following variables: crisis index (dependent variable), independent variables are: correlation rate of current account and GDP, correlation rate of domestic credit on private sector with GDP, correlation rate between for- eign currency reserves and conditional amounts of market derivatives on the stock exchange. Empirical analysis shows us that influence of derivatives over financial stability is not unilateral and depends on characteristics of financial system of the country. Particularly, in Singapore and USA, where fi- nancial system is strong, influence of derivatives is positively reflected on financial stability, and empirical study conducted on example of emerging markets, particularly, Argentina, Russia and Brazil revealed negative influence of derivatives on financial system.