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Risk Management Failures

Author

Listed:
  • Matthieu Bouvard
  • Samuel Lee
  • Itay Goldstein

Abstract

We model risk management as information acquisition that delays trading decisions. In markets with preemptive competition, this can lead to a race to the bottom, where prioritizing trade execution over risk management is optimal for each firm, but collectively inefficient. As time competition intensifies, mean trading profit supplants risk concerns as the main driver of risk management quality, causing risk misallocation to rise with trading speed and volume. This pathology of risk management failure—the trio of time-consuming risk assessment, preemptive competition, and boom markets—has distinctive regulatory implications.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

  • Matthieu Bouvard & Samuel Lee & Itay Goldstein, 2020. "Risk Management Failures," The Review of Financial Studies, Society for Financial Studies, vol. 33(6), pages 2468-2505.
    • Handle: RePEc:oup:rfinst:v:33:y:2020:i:6:p:2468-2505.
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    File URL: http://hdl.handle.net/10.1093/rfs/hhz115
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    Cited by:

    1. Mikel Bedayo & Gabriel Jiménez & José-Luis Peydró & Raquel Vegas, 2020. "Screening and Loan Origination Time: Lending Standards, Loan Defaults and Bank Failures," Working Papers 1215, Barcelona School of Economics.
    2. Glebkin, Sergei & Kuong, John Chi-Fong, 2023. "When large traders create noise," Journal of Financial Economics, Elsevier, vol. 150(2).
    3. Dasol Kim & Luke Olson & Toan Phan, 2024. "Bank Competition and Strategic Adaptation to Climate Change," Working Paper 24-06, Federal Reserve Bank of Richmond.
    4. Huimin Guo & Zheyao Pan & Gary Gang Tian, 2021. "State ownership and the risk‐reducing effect of corporate derivative use: Evidence from China," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 48(5-6), pages 1092-1133, May.
    5. Ye, Zhiwei & Shahab, Yasir & Riaz, Yasir & Ntim, Collins G., 2023. "Strategic deviation and the cost of debt financing," Economic Modelling, Elsevier, vol. 125(C).

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