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On the Determinants of Derivative Hedging by Insurance Companies: Evidence from Taiwan

Yung-Ming Shiu, Chi- Feng Wang, Andrew Adams and Yi-Cheng Shin
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Yung-Ming Shiu: Professor, Department of Risk Management and Insurance, Research Fellow, Risk and Insurance Research Center, College of Commerce National Chengchi University, Taiwan 64, Sec. 2, Zhi-Nan Road, Wen-Shan District, Taipei 11605, Taiwan
Chi- Feng Wang: Assistant Professor Department of Business Administration National Yunlin University of Science and Technology No.123, University Road, Section 3, Douliou, Yunlin 64002, Taiwan
Andrew Adams: School of Management and Languages Heriot-Watt University Edinburgh, EH14 4AS, UK
Yi-Cheng Shin: Graduate Institute of International Business, Tunghai University, Taiwan

Asian Economic and Financial Review, 2012, vol. 2, issue 4, 538-552

Abstract: There has been considerable growth in the derivatives holdings of Taiwanese insurance companies in recent years and this study examines the determinants of derivative use for both life and non-life companies. The determinants are different in the two insurance sectors. For the life sector, we find that large firms and firms exposed to either foreign exchange risk or interest rate risk (due to the duration of liabilities being greater than that of the assets) are more likely to participate in derivative hedging activities. In the case of foreign exchange risk, the greater the exposure, the greater the derivative holdings (as a proportion of the total assets of the firm). For the non-life sector, exposure to interest rate risk (as measured by net interest margin) and foreign exchange risk have a significant influence on the derivative participation decision. The level of derivative holdings is then positively related to foreign exchange exposure and negatively related to the level of reinsurance.

Keywords: Derivative use; Hedging; Insurance companies (search for similar items in EconPapers)
Date: 2012
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