Effects of Derivatives on Bank Risk

Dong-Hoon Yang (), Inman Song (), Junesuh Yi () and Young-Hyeon Yoon ()
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Dong-Hoon Yang: School of IT Business, Information and Communications University (ICU), 119, Munjiro, Yuseong-gu, Daejeon 305-714, Korea
Inman Song: School of Business, SungKyunKwan University, 53 Myeongnyun-dong 3-ga, Chongno-gu, Seoul 100-745, South Korea
Junesuh Yi: College of Business Administration, Dongguk University, 3-26 Pil-dong, Chung-gu, Seoul 100-715, Korea
Young-Hyeon Yoon: International Trade and Foreign Exchange Team, Kookmin Bank, #9-1 Namdaemunro 2-ga, Chung-gu, Seoul 100-715, Korea

Review of Pacific Basin Financial Markets and Policies (RPBFMP), 2006, vol. 09, issue 02, 275-295

Abstract: This study investigates the empirical relationship between the use of derivatives by Korean banks and risk. In doing so, we employ two alternative measures of proxy for firm risk: systematic risk andex anteearnings volatility.Contrary to the general concerns about the risk-increasing role of the use of derivative products, our results indicate that banks' derivatives are, on average, associated with two measures of risk in negative ways. The evidence is consistent with the conjectures that derivative use reduces noise related to exogenous factors and hence decreases firm risk. This suggests that equity market participants, on average, perceive derivative activities by banks as a sign of banks' efforts to reduce risk.

Keywords: Disclosure quality; capital structure; derivatives; firm risk (search for similar items in EconPapers)
JEL-codes: G1 G2 G3 (search for similar items in EconPapers)
Date: 2006
References: View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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DOI: 10.1142/S0219091506000756

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