HEDGING OF CREDIT DERIVATIVES, SYSTEMATIC FLUCTUATION AND BANKING STABILITY IN CHINA

Qi-An Chen and Fangzhou Du ()
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Qi-An Chen: Department of Finance, School of Economics and Business Administration, Chongqing University, 174 Shazheng Street, Shapingba District, Chongqing, China
Fangzhou Du: Department of Finance, School of Economics and Business Administration, Chongqing University, 174 Shazheng Street, Shapingba District, Chongqing, China

The Singapore Economic Review (SER), 2017, vol. 62, issue 04, 809-836

Abstract: The objective of this paper is to theoretically and empirically identify the effects of hedging and systematic fluctuation on banking stability in China. First, theoretical propositions indicate that the impact of credit derivative hedging and systematic fluctuation on banking stability in China is derived on the basis of a newly established theoretical model. Then, empirical research based on one-stage and two-stage GMM methods suggests that ascending hedging degrees leads to a linearly improving condition for banking stability with respect to overnight lending swap hedging, an improving-then-worsening condition for compensation swaps and an improving–worsening–improving condition for deposit swap hedging; at the same time, the ascending level of systematic fluctuation associated with hedging improves banking stability. Moreover, the trade-off between loan expansion and the stability maintenance of banking sectors can be managed by hedging compensation swaps and overnight lending swaps. In general, the empirical results support the applicability of the theoretical model, and the hedging of certain swaps can be used as a tool for stability maintenance purposes.

Keywords: Hedging; systematic fluctuation; banking stability; credit derivatives (search for similar items in EconPapers)
Date: 2017
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DOI: 10.1142/S0217590817400288

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