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Interest Rate Risk Management in Uncertain Times

Author

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  • Lorenzo Bretscher
  • Lukas Schmid
  • Andrea Vedolin

Abstract

We revisit evidence of real effects of uncertainty shocks in the context of interest rate uncertainty. We document that adverse movements in interest rate uncertainty predict significant slowdowns in real activity, both at the aggregate and at the firm levels. To understand how firms cope with interest rate uncertainty, we develop a dynamic model of corporate investment, financing, and risk management and test it using a rich data set on corporate swap usage. We find that interest rate uncertainty depresses financially constrained firms’ investments in spite of hedging opportunities, because risk management by means of swaps is effectively risky. Received December 11, 2016; editorial decision January 26, 2018 by Editor Itay Goldstein. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web Site next to the link to the final published paper online.

Suggested Citation

  • Lorenzo Bretscher & Lukas Schmid & Andrea Vedolin, 2018. "Interest Rate Risk Management in Uncertain Times," The Review of Financial Studies, Society for Financial Studies, vol. 31(8), pages 3019-3060.
    • Handle: RePEc:oup:rfinst:v:31:y:2018:i:8:p:3019-3060.
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    File URL: http://hdl.handle.net/10.1093/rfs/hhy039
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    Cited by:

    1. Gao, Lin & Hitzemann, Steffen & Shaliastovich, Ivan & Xu, Lai, 2022. "Oil volatility risk," Journal of Financial Economics, Elsevier, vol. 144(2), pages 456-491.
    2. Refet Gürkaynak & Hati̇ce Gökçe Karasoy‐Can & Sang Seok Lee, 2022. "Stock Market's Assessment of Monetary Policy Transmission: The Cash Flow Effect," Journal of Finance, American Finance Association, vol. 77(4), pages 2375-2421, August.
    3. Nikolov, Boris & Schmid, Lukas & Steri, Roberto, 2019. "Dynamic corporate liquidity," Journal of Financial Economics, Elsevier, vol. 132(1), pages 76-102.
    4. Guillaume Vuillemey, 2019. "Bank Interest Rate Risk Management," Management Science, INFORMS, vol. 65(12), pages 5933-5956, December.
    5. Dew-Becker, Ian & Giglio, Stefano & Kelly, Bryan, 2021. "Hedging macroeconomic and financial uncertainty and volatility," Journal of Financial Economics, Elsevier, vol. 142(1), pages 23-45.
    6. Cremers, Martijn & Fleckenstein, Matthias & Gandhi, Priyank, 2021. "Treasury yield implied volatility and real activity," Journal of Financial Economics, Elsevier, vol. 140(2), pages 412-435.
    7. Segal, Gill & Shaliastovich, Ivan, 2023. "Uncertainty, risk, and capital growth," SAFE Working Paper Series 388, Leibniz Institute for Financial Research SAFE.
    8. Saurabh Mishra & Sachin B. Modi & Michael A. Wiles, 2022. "Economic policy uncertainty and shareholder wealth: the role of marketing, operations, and R&D capabilities," Journal of the Academy of Marketing Science, Springer, vol. 50(5), pages 1011-1031, September.
    9. Yasmeen Bayaa & Mahmoud Qadan, 2024. "Interest rate uncertainty and the shape of the yield curve of U.S. treasury bonds," Eurasian Economic Review, Springer;Eurasia Business and Economics Society, vol. 14(4), pages 981-1003, December.
    10. Bulusu, Narayan & Guérin, Pierre, 2019. "What drives interbank loans? Evidence from Canada," Journal of Banking & Finance, Elsevier, vol. 106(C), pages 427-444.
    11. Detemple, Jérôme & Kitapbayev, Yerkin & Reppen, A. Max, 2024. "Renewable energy investment under stochastic interest rate with regime-switching volatility," Energy Economics, Elsevier, vol. 136(C).

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