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Using an Alternative Estimation Method to Perform Comprehensive Empirical Tests: An Application to Interest Rate Risk-Management

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  • Michael S. Pagano

Abstract

Using a sample of 241 U.S. bank holding companies, we test all relevant rationales for corporate risk-management activities related to interest rate risk. Three main results emerge: (1) measurement error and the possibility of multiple influences on the model's proxy variables indicate that the confirmatory factor analysis method can provide a more accurate and comprehensive test of interest rate risk-management rationales than conventional estimation techniques, (2) the corporate risk-management theories most consistently supported are those related to financial distress costs and firm size, and (3) an exogenous factor related to interest rate volatility negatively influences a firm's interest rate risk exposure.

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  • Michael S. Pagano, 2004. "Using an Alternative Estimation Method to Perform Comprehensive Empirical Tests: An Application to Interest Rate Risk-Management," Review of Quantitative Finance and Accounting, Springer, vol. 23(4), pages 377-406, December.
    • Handle: RePEc:kap:rqfnac:v:23:y:2004:i:4:p:377-406
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    Cited by:

    1. Ulf Mohrmann & Jan Riepe, 2019. "The link between the share of banks’ Level 3 assets and their default risk and default costs," Review of Quantitative Finance and Accounting, Springer, vol. 52(4), pages 1163-1189, May.

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