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Currency carry trades, risk management, and firm value: Evidence from Korean banking industry

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  • Kim, Sungjae Francis

Abstract

I examine the relationship between a firm's risk-taking, risk management, and firm value using a unique dataset of banks' currency carry trades. I find that banks can significantly increase bank value by hedging market and credit risks while engaging in carry trades. I also find that interest rate differentials stemming from monetary policy divergences have a significant impact on banks' risk-taking. The empirical results show that banks can increase their market value more when the interest rate differential is narrower, more sharply when they actively engage in currency carry trades, and most sharply when they actively hedge interactive risks.

Suggested Citation

  • Kim, Sungjae Francis, 2023. "Currency carry trades, risk management, and firm value: Evidence from Korean banking industry," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 88(C).
    • Handle: RePEc:eee:intfin:v:88:y:2023:i:c:s104244312300118x
    DOI: 10.1016/j.intfin.2023.101850
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    More about this item

    Keywords

    Risk-taking; Carry trades; Risk management; Hedge; Firm value; Monetary policy;
    All these keywords.

    JEL classification:

    • F30 - International Economics - - International Finance - - - General
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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