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Do Hedging and Trading Derivatives Have the Same Impact on Public European Banks’ Value and Share Performance?

In most cases the ultimate goal of a bank is profit maximization. That depends on what derivatives one uses. Thus the objective of this research is to examine the relationship between a bank’s value and characteristics of derivatives it subscribed to. The financials from 2005 to 2010 of 130 European public banks countries are examined. The study is based on two sets of data: the first one contains the accounting data on balance sheets and the profit and loss accounts from Bankscope from 2005 to 2010, while the second one includes the manually collected data from the notes to the financial statement disclosures. Regression analysis is used to trace the impact of derivative use on bank’s value. Time effects and cross-country differences are controlled for. Two key research implications are as follows. The return on hedging derivatives is positively associated with the growth in bank’s stock returns, whereas trading derivatives’ notional value negatively impacts both Tobin’s q and ROAA, and positively impacts risk of the bank’s stocks.