Year: 2019
Type: article
Abstract: We examine the relationship between equity risk and the use of financial derivatives with a sample of 555 banks from eighteen developed markets from 2006 to 2015. Our main findings suggest that banks’ use of financial derivatives increased their risk. This increase in risk can be driven by banks’ use of derivatives for speculative purposes, by suboptimal hedging to obtain hedge accounting status, or from accounting mismatches that generate volatility in earnings. We also show that this relationship is nonlinear. Too-Big-To-Fail banks and those that employ a traditional retail banking business model are subject to lower idiosyncratic risk. We address endogeneity concerns using instrumental variables capturing the use of derivatives with portfolio ranking. Overall, our study contributes to understanding the impact of derivatives use on bank risk and the risk consequences of a bank’s business model choice.
Source: Accounting and Business Research
Authors: Xing Huan, Antonio Parbonetti
Institutions: University of Warwick, University of Padua
Language: English
Subfield: Accounting
Domain: Social Sciences
Open Access status: green
Funder: Irish Research Council
Award: G3101788894
OpenAlex ID: W2947727628