Dynamic Risk Management

61 Pages Posted: 1 Jul 2011 Last revised: 7 Sep 2013

Adriano A. Rampini

Duke University; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Amir Sufi

University of Chicago - Booth School of Business; NBER

S. Viswanathan

Duke University - Fuqua School of Business; Duke University - Department of Economics

Date Written: August 2013

Abstract

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.

Keywords: Collateral, Risk management, Commodity prices, Financial distress, Airlines

JEL Classification: G32, D92, E22

Suggested Citation

Rampini, Adriano A. and Sufi, Amir and Viswanathan, S., Dynamic Risk Management (August 2013). Journal of Financial Economics (JFE), Forthcoming; Fama-Miller Working Paper; Chicago Booth Research Paper No. 13-40. Available at SSRN: https://ssrn.com/abstract=1875051 or http://dx.doi.org/10.2139/ssrn.1875051

Adriano A. Rampini (Contact Author)

Duke University ( email )

100 Fuqua Drive
Durham, NC 27708
United States
+1 919 660-7797 (Phone)
+1 919 660-8038 (Fax)

HOME PAGE: http://faculty.fuqua.duke.edu/~rampini/

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR) ( email )

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

Amir Sufi

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

NBER

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

S. Viswanathan

Duke University - Fuqua School of Business ( email )

Durham, NC 27708-0120
United States
919-660-7784 (Phone)
919-684-2818 (Fax)

Duke University - Department of Economics

213 Social Sciences Building
Box 90097
Durham, NC 27708-0204
United States

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