Dynamic risk management |
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Authors: | Adriano A. Rampini Amir Sufi S. Viswanathan |
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Affiliation: | 1. Duke University, Fuqua School of Business, 100 Fuqua Drive, Durham, NC 27708, USA;2. University of Chicago, Booth School of Business, 5807 South Woodlawn Avenue, Chicago, IL 60637, USA |
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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. |
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Keywords: | D92 E22 G32 |
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