Interest Rate Risk Management in Uncertain Times
58 Pages Posted: 18 Jan 2016 Last revised: 5 Dec 2017
Date Written: December 4, 2017
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: Suggested Citation