A Study on Foreign Banks‘ Short Borrowings and Volatilities of Stock Markets & FX Markets in Korea: Focus on aTe Derivatives

Young Sook Suh (Standard Chartered Bank Korea)

Journal of Derivatives and Quantitative Studies: 선물연구

ISSN: 1229-988X

Article publication date: 28 February 2015

Abstract

This study examines how FX OTC derivatives transactions of foreign banks’ branches funded by short term borrowings affect the volatility of stock markets and FX markets in Korea based on historical data. It founds that they use call money for FX-derivatives trading, rather than borrowings from their Head Quarter. This result also proves that their derivatives trading is funded by call market increasing stock markets’ volatility in Korea, even if foreign banks’ branches have been using various funding sources. Also the role of foreign banks’ branches as FX money supplier for the korean local banks effects to stock markets by increasing the volatility via call markets. On the other hands, derivatives liabilities of foreign banks’ branches tend to increase volatility of the korean stock markets, but their derivatives assets tend to decrease the volatility. This result together with O/N dollar call volatility should be regarded as a kind of liquidity risk because they could give serious impacts to Korean financial markets if shocks break out. When considering the main revenue source of foreign banks’ branches, derivatives trading creates much higher leverage effects to them than korean local banks, and their roles in financial and capital markets of Korea this study provides with a reason that regulators should give complex and multilateral attentions to foreign banks’ branches.

Keywords

Citation

Suh, Y.S. (2015), "A Study on Foreign Banks‘ Short Borrowings and Volatilities of Stock Markets & FX Markets in Korea: Focus on aTe Derivatives", Journal of Derivatives and Quantitative Studies: 선물연구, Vol. 23 No. 1, pp. 125-153. https://doi.org/10.1108/JDQS-01-2015-B0006

Publisher

:

Emerald Publishing Limited

Copyright © 2015 Emerald Publishing Limited

License

This article is published under the Creative Commons Attribution (CC BY 4.0) licence. Anyone may reproduce, distribute, translate and create derivative works of this article (for both commercial and non-commercial purposes), subject to full attribution to the original publication and authors. The full terms of this licence may be seen at http://creativecommons.org/licences/by/4.0/legalcode