Hedging Of Financial Derivatives, Macroeconomic Risk And The Risk Taking Behaviors Of Commercial Banks: Theory And Evidence

Since 1990 s, the hedging of financial derivatives has been widely applied by the commercial banks in their operations. However, the debate of the hedging's impact on the risk-taking behaviors have always been ongoing since the very beginning. Because of the worldwide financial crisis triggered by the sub-prime derivatives in 2007, the intellectuals and practitioners become seriously concerned about the real effects of financial derivatives' hedging on the risk-taking behaviors of commercial banks. Will the hedging stimulate the loan behavior ? Is the hedging helpful for the risk control of commercial banks? Can the financial derivatives effectively hedge the impact of macroeconomic risk on the stability of commercial banks? These questions have been intensively debated by the intellectuals in the past a few years and no consensus has yet been reached. In the recent years, as the pace of financial innovation accelerated, the hedging of financial derivatives in the inter-banks market has also been applied by commercial banks in China. However, due to initial stage of the financial innovation,there has not been a large varieties of available financial derivatives and the volume of hedging is not large enough, which makes the intellectuals in China has not paid enough attention to the impact of hedging on the risk-taking behaviors of commercial banks in China. Therefore, Associating with the circumstances of commercial banks and inter-bank derivative market in China, investigating the real effects and natures of hedging with theoretical and empirical approaches is meaningful to the stability maintenance and well-balanced operation of commercial banks in China.Based on a board consideration of financial derivatives in China, macroeconomic risk and risk-taking behaviors, both theoretical and empirical approaches are applied to reveal the impacts of hedging and macroeconomic risk on the loan behaviors of commercial banks, individual stability of commercial banks and the banking stability as a whole. The main contents and contributions of the thesis are as follows.(1) A theoretical model is established on the basis of rational hypotheses and definitions in accordance with the circumstances of the inter-bank market in China. The theoretical conclusions can be derived from the theoretical model, which implies that the impact of hedging on the loan size and risk level of commercial banks can be linear,U-shaped or cubic, whereas the hedging can effectively reduce the destructive impacts of the macroeconomic risk on the risk level of commercial banks. Moreover, thetheoretical model also indicates that the different risk-orientations of commercial banks will not lead to distinctively different trends of the hedging's impact on the risk level of commercial banks in China.(2) Based on the time serial raw data of listed commercial banks and inter-bank market in China, as the loan behavior of commercial banks is measured by the loan amount of commercial banks, pooled GLS, One-stage GMM and Two-stage GMM are applied to reveal to the impact of hedging and macroeconomic risk on the loan behaviors in China empirically. The empirical research on the loan size implies that the ascending hedging degree of compensation swaps will decrease the loan size first and then increase it,while the ascending hedging degree of deposit swaps will increase the loan size and the impact ascending hedging degree of overnight lending on loan will be in ‘increasing then decreasing' condition. The empirical process also indicates that the macroeconomic risk will be negatively correlated to the loan size with the hedging of compensation swaps, whereas positively correlated to the loan size with the hedging of deposit swaps and overnight lending swaps, meanwhile, the macroeconomic risk serves as an accompanied variable with the hedging degree. Meanwhile, it can be inferred that the risk orientation of commercial banks can determine the trend of impacts on the risk-taking behaviors.(3) Based on the time serial raw data of listed commercial banks and inter-bank market in China, as the individual stability of commercial banks is measured by the absolute variation of the revenue from loans, hedging behaviors and risk-free assets, the common parameter pooled GLS and the variable parameter pooled GLS methods are applied to investigate the impacts of hedging and macroeconomic risk on the individual stability of commercial banks. The empirical results indicate that the hedging of compensation swaps can effectively make the individual stabilities of 12 listed commercial banks in China to a best condition( minimum point of positive U shape curves), while the hedging of overnight lending swaps can only make the individual stabilities of 4 non-state owned commercial banks in China to a best condition.Meanwhile, the hedging of deposit swaps cannot significantly influence the individual stability of any listed commercial banks in China. Compared to the existing researches,the empirical approach consider the different characteristics of the operations of different banks, which can provide implications of the absolute risk taking level of individual commercial banks in China.(4) Based on the time serial raw data of listed commercial banks and inter-bankmarket in China, and the banking stability is measured by the variation of the revenue per core capital from loans, hedging behaviors and risk-free assets. The empirical process is based on the pooled GLS, one-stage GMM and two-stage GMM methods.The empirical results reveal that increasing degrees of hedging will lead to a linearly improving condition in banking stability with respect to hedging overnight lending swaps, an improving-then-worsening condition in the case of hedging compensation swaps, and an improving-worsening-improving condition in the case of hedging deposit swaps. The estimated results also suggest that the macroeconomic risk is negatively correlated to the banking stability with the hedging of financial derivatives, which implies that financial derivatives can effectively hedge the impact of macroeconomic risk on banking stability in China. In general, the empirical process indicate the impacts of hedging and macroeconomic risk on the stability from the aspect of the banking industry supervision,moreover, the trade-off between loan expansion and maintenance of the banking industry has also been analyzed.