Dynamic Risk Management
Adriano A. Rampini
University of Chicago - Booth School of Business; NBER
Duke University - Fuqua School of Business; Duke University - Department of Economics
August 1, 2012
Chicago Booth Research Paper No. 13-40
Fama-Miller Working Paper
Both financing and risk management involve promises to pay which need to be collateralized resulting in a financing vs. risk management trade-off. We study this trade-off in a dynamic model of commodity price risk management and show that risk management is limited and that more financially constrained firms hedge less or not at all. We document that these predictions are consistent with the evidence using panel data for fuel price risk management by airlines. More constrained airlines hedge less both in the cross section and within airlines over time. Risk management drops substantially as airlines approach distress and recovers only slowly after airlines enter distress.
Number of Pages in PDF File: 62
Keywords: risk management, collateral, corporate finance, hedging, distress
JEL Classification: G32, G33, D22, D92, E22working papers series
Date posted: July 1, 2011 ; Last revised: April 19, 2013
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