An integrated Data Envelopment Analysis (DEA) and hedge accounting approach for risk management efficiency measurment: Evidence from derivative market in Asia-Pacific banks

Financial derivatives products are believed to be significant tools for mitigating market risks. Accounting practice treats transactions on financial derivatives to highlight its role on the items being hedged (hedged items) but it does not represent a holistic context of the derivative instrument used, particularly as a risk management tool. This study develops an extension of hedge effectiveness analysis tested by dollar-offset ratio integrated with a non-parametric approach (Data Envelopment Analysis - DEA) to provide an overall evaluation of derivatives for risk management. Twelve banks in Asia-Pacific region are selected as a sample. The twofold results of analysis first indicate the implications on the extension of hedge effectiveness test using DEA, and second, discuss the differences in bank's risk management efficiency between developed and developing markets.