Published:
Cambridge, Mass: National Bureau of Economic Research, 2019
Published in:NBER working paper series ; no. w25698
Extent:
1 Online-Ressource; illustrations (black and white)
Language:
English
DOI:
10.3386/w25698
Identifier:
Reproduction note:
Hardcopy version available to institutional subscribers
Origination:
Footnote:
System requirements: Adobe [Acrobat] Reader required for PDF files
Mode of access: World Wide Web
Description:
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, both 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