Dynamic Risk Management
Adriano A. Rampini
Duke University; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)
University of Chicago - Booth School of Business; NBER
Duke University - Fuqua School of Business; Duke University - Department of Economics
Journal of Financial Economics (JFE), Forthcoming
Fama-Miller Working Paper
Chicago Booth Research Paper No. 13-40
Both financing and risk management involve promises to pay that need to be collateralized, resulting in a financing versus 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 show 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: 61
Keywords: Collateral, Risk management, Commodity prices, Financial distress, Airlines
JEL Classification: G32, D92, E22
Date posted: July 1, 2011 ; Last revised: September 7, 2013
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