Interest Rate Risk Management in Uncertain Times

58 Pages Posted: 18 Jan 2016 Last revised: 5 Dec 2017

See all articles by Lorenzo Bretscher

Lorenzo Bretscher

London Business School - Department of Finance

Lukas Schmid

University of Southern California - Marshall School of Business

Andrea Vedolin

Boston University - Department of Finance & Economics

Date Written: December 4, 2017

Abstract

We revisit the evidence on real effects of uncertainty shocks in the context of interest rate uncertainty, which can be hedged in the swap market. We document that adverse movements in interest rate uncertainty predict significant slowdowns in real activity, at the aggregate and at the firm-level. We develop a dynamic model of corporate investment and risk management to examine how firms cope with interest rate uncertainty and test it using a rich dataset on corporate swap usage. Our results suggest that interest rate uncertainty depresses financially constrained firms' investment in spite of hedging opportunities, as for these firms risk management through swaps is, effectively, risky.

Keywords: interest rate uncertainty, volatility, risk management, interest rate swaps, financial frictions, corporate investment, leverage, credit risk

JEL Classification: E22, E44, G30

Suggested Citation

Bretscher, Lorenzo and Schmid, Lukas and Vedolin, Andrea, Interest Rate Risk Management in Uncertain Times (December 4, 2017). Available at SSRN: https://ssrn.com/abstract=2716993 or http://dx.doi.org/10.2139/ssrn.2716993

Lorenzo Bretscher

London Business School - Department of Finance ( email )

Sussex Place
Regent's Park
London NW1 4SA
United Kingdom

Lukas Schmid (Contact Author)

University of Southern California - Marshall School of Business ( email )

701 Exposition Blvd, HOH 431
Los Angeles, CA California 90089-1424
United States

Andrea Vedolin

Boston University - Department of Finance & Economics ( email )

595 Commonwealth Avenue
Boston, MA 02215
United States

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