Risk Management in Financial Institutions

68 Pages Posted: 22 Oct 2015 Last revised: 29 Jul 2019

See all articles by Adriano A. Rampini

Adriano A. Rampini

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

S. Viswanathan

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

Guillaume Vuillemey

HEC Paris - Finance Department

Multiple version iconThere are 3 versions of this paper

Date Written: July 2019

Abstract

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 drops 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.

Keywords: Risk management, Financial institutions, Interest rate risk, Foreign exchange risk, Financial constraints, Derivatives

JEL Classification: G21, G32, D92, E44

Suggested Citation

Rampini, Adriano A. and Viswanathan, S. and Vuillemey, Guillaume, Risk Management in Financial Institutions (July 2019). Journal of Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2677051 or http://dx.doi.org/10.2139/ssrn.2677051

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 )

London
United Kingdom

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

Guillaume Vuillemey

HEC Paris - Finance Department ( email )

1 rue de la Libération
Paris, Not Applicable 78351
France
+33660204275 (Phone)

HOME PAGE: http://sites.google.com/site/guillaumevuillemey/home

Register to save articles to
your library

Register

Paper statistics

Downloads
981
Abstract Views
3,438
rank
21,760
PlumX Metrics