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Hedging with Derivatives and Value Creation : an Empirical Examination in the Insurance Industry

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  • Luis Otero González, Sara Fernández López, Onofre Martorell Cunill

Abstract

This paper aims to analyze the reasons why insurance companies make the decision to hedge their corporate risk through derivatives, and to identify the variables that determine hedging volume in the context of the agency theory and maximization of firm value. The empirical study is based on data provided by 28 Spanish life insurers. Apart from being a pioneering work in the Spanish insurance industry, this paper also includes several variables that have not been taken into account in previous studies. The results indicate that hedging decision and volume are positively related to the company’s size, leverage and interest rate exposure. We also find that the type of product is important in the hedging decision. Finally, companies that use derivatives have a great return on assets that suggest a relationship between hedging decision and value creation.

Suggested Citation

  • Luis Otero González, Sara Fernández López, Onofre Martorell Cunill, 2011. "Hedging with Derivatives and Value Creation : an Empirical Examination in the Insurance Industry," Frontiers in Finance and Economics, SKEMA Business School, vol. 8(1), pages 17-42, April.
    • Handle: RePEc:ffe:journl:v:8:y:2011:i:1:p:17-42
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    Keywords

    derivatives; risk management; value creation; life insurer; logit; Tobit.;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies

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