Derivative activities and Chinese banks’ exposures to exchange rate and interest rate movements

Chris Adcock, Xiuping Hua, Khelifa Mazouz, Shuxing Yin

Research output: Journal PublicationArticlepeer-review

3 Citations (Scopus)

Abstract

This study investigates the impact of Chinese banks’ derivative activities on their exposure to exchange rate and interest rate changes. The standard Jorion [1990. “The Exchange-Rate Exposure of U.S. Multina-tionals.” Journal of Business 63 (3): 331–345] model provides weak evidence of Chinese banks’ exposure to these risks. However, the exposure increases substantially when time-varying exposure regressions with orthogonalised market returns are used. We also show that Chinese banks exhibit linear and nonlinear exposures to the exchange rate and interest rate fluctuations. Further analysis indicates that the use of derivatives reduces banks’foreign exchange risk, but does not affect their interest rate exposure. Derivative products are more likely to be used as an integrated part of the Chinese banks’ risk management systems, which could thus help to stabilise the banking system.

Original languageEnglish
Pages (from-to)727-751
Number of pages25
JournalEuropean Journal of Finance
Volume23
Issue number7-9
DOIs
Publication statusPublished - 15 Jul 2017

Keywords

  • Chinese banks
  • Derivative activities
  • Foreign exchange exposure
  • Interest rate exposure

ASJC Scopus subject areas

  • Economics, Econometrics and Finance (miscellaneous)

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