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Derivative activities and Asia-Pacific banks' interest rate and exchange rate exposures

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  • Au Yong, Hue Hwa
  • Faff, Robert
  • Chalmers, Keryn

Abstract

In this paper, we investigate whether the level of derivative activities of Asia-Pacific banks is associated with the market's perception of their interest rate and exchange rate risks. The results suggest that the level of derivative activities (especially interest rate derivatives) is positively associated with long-term interest rate exposure (LTIR) but negatively associated with short-term interest rate exposure (STIR). Further investigations reveal that the positive LTIR exposures are driven by banks with extensive derivative activities. We do not find any significant association between banks' derivative activities and exchange rate exposure. The significant positive association between the level of derivative activities and LTIR suggests the need for better management of banks' internal control systems and/or greater derivative disclosure requirements to bring stronger market discipline to banks, particularly for banks with extensive derivative activities.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of International Financial Markets, Institutions and Money.

Volume (Year): 19 (2009)
Issue (Month): 1 (February)
Pages: 16-32

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Handle: RePEc:eee:intfin:v:19:y:2009:i:1:p:16-32

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Web page: http://www.elsevier.com/locate/intfin

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Keywords: Derivatives Asia-Pacific banks Interest rate exposure Exchange rate exposure;

References

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Citations

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Cited by:
  1. Maxim Zagonov, 2011. "Securitization and Bank Intermediation Function," Finance zagonov-wpsz2011, Socionet.
  2. Lucia Esposito & Andrea Nobili & Tiziano Ropele, 2013. "The management of interest rate risk during the crisis: evidence from Italian banks," Temi di discussione (Economic working papers) 933, Bank of Italy, Economic Research and International Relations Area.
  3. Gloria M. Soto Pacheco & Cristóbal González & Laura Ballester & Román Ferrer, 2009. "Determinants of interest rate exposure of Spanish banking industry," Working Papers. Serie EC 2009-07, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).

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