The effect of financial derivatives on wealth inequality

Abstract

This paper explores the relationship between financial derivatives and wealth inequality. While previous studies have acknowledged a connection between finance and inequality, the precise nature of this relationship remains uncertain. Our study aims to contribute to this discourse by isolating the impact of financial derivatives on wealth distribution, controlling for other financial factors. Using data for 15 countries from 2001–2021, we examine the relationship of exchange-traded derivatives from the Bank of International Settlements and pre-income tax wealth Gini coefficients for adults from the World Inequality Database. Employing panel econometric techniques and controlling for country fixed effects, we analyze the dynamic relationship between these variables. Contrary to conventional financial theory, which often views derivatives as redundant assets, our findings reveal a positive, significant and robust association between wealth inequality and the use of derivatives. This challenges prevailing assumptions and underscores the importance of derivatives in shaping global wealth distribution dynamics.