Risk Management in Financial Institutions

Journal Article (Journal)

We study risk management in financial institutions using data on hedging of interest rate and foreign exchange risk. We find strong evidence that institutions with higher net worth hedge more, controlling for risk exposures, across institutions and within institutions over time. For identification, we exploit net worth shocks resulting from loan losses due to declines in house prices. Institutions that sustain such shocks reduce hedging significantly relative to otherwise-similar institutions. The reduction in hedging is differentially larger among institutions with high real estate exposure. The evidence is consistent with the theory that financial constraints impede both financing and hedging.

Full Text

Duke Authors

Cited Authors

  • Rampini, AA; Viswanathan, S; Vuillemey, G

Published Date

  • April 1, 2020

Published In

Volume / Issue

  • 75 / 2

Start / End Page

  • 591 - 637

Electronic International Standard Serial Number (EISSN)

  • 1540-6261

International Standard Serial Number (ISSN)

  • 0022-1082

Digital Object Identifier (DOI)

  • 10.1111/jofi.12868

Citation Source

  • Scopus