Volume of Derivative Trading, Enterprise Value, and the Return on Assets

Abstract

We study how the volume of derivatives trading is associated with the return on assets (ROA), as well as the enterprise value proxied by abnormal return (AR), before and after the US Financial Crisis. Results suggest that before the crisis, the volume of over-the-counter trading, which tends to be less strictly regulated and thus can be more flexibly applied, is positively associated with AR and ROA, while exchange trading is not. After the financial crisis, exchange trading, which is more heavily regulated and thus has lower credit risks, is positively associated with AR and ROA. This implies that the kinds of derivatives products having a positive or negative effect on the enterprise value of financial institutions may vary according to each period of the economy. Therefore, in full consideration of the above, it is recommended that more appropriate alternatives to the regulations and inspections should be provided for derivatives products and trading methods of financial institutions.