The relationship between derivative instruments and systematic risk: a study on banks trading on BIST

Emre Esat Topaloglu,Turhan Korkmaz

doi:10.21511/bbs.14(2).2019.13

Abstract

This study is aimed to analyze the relationship between the use of derivative financial instruments for speculative and hedging purposes and systematic risk. The effect of the use of derivatives by seven banks trading on Borsa Istanbul during the period of June 2007 – December 2017 on systematic risk was studied using panel cointegration, causality and regression analyses. Banking sector was examined within the scope of the study, since the level of use of derivatives is high in this sector. It was identified in the study that there is a long-run cointegration relationship between the use of derivatives and systematic risk. It was also identified that there is a significant and negative relationship between the use of derivatives for speculative purposes and systematic risk. Furthermore, it was determined that there is a one-way causality relationship from the use of derivatives for speculative purposes towards systematic risk. However, there was no relationship identified between the use of derivatives for hedging purposes and systematic risk. On the other hand, significant and negative relationship was identified between swap transactions that banks use for speculative purposes and systematic risk, while there was no significant relationship determined between forward and option contracts and systematic risk.

Highlights

The activities of firms have reached an international level exceeding national boundaries owing to financial globalization
Banking sector was examined within the scope of the study, since the level of use of derivatives is high in this sector
There was no relationship identified between the use of derivatives for hedging purposes and systematic risk

Summary

Introduction

The activities of firms have reached an international level exceeding national boundaries owing to financial globalization. As a result of the activities firms carry out in financial markets, they encounter some risks. These risks can arise from within the firm as well as from external factors. Systematic risk is the variability of return on shares or portfolios associated with changes in return on the overall market. In other words, these are the risks that are caused by economic, political and other environmental conditions affecting all firms in business. Unsystematic risk is either a firm-specific threat or a risk that only affects a particular industry This type of risks generally includes business or industry risk, financial risk and administrative risk.

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