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

Author: Michael S. Pagano

Source: Review of Quantitative Finance and Accounting, Volume 23, Number 4, December 2004 , pp. 377-406(30)

Publisher: Springer

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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.

Keywords: risk-management; empirical analysis; corporate finance; banks

Document Type: Research article

DOI: http://dx.doi.org/10.1023/B:REQU.0000049322.82965.cc

Affiliations: 1: Villanova University, College of Commerce and Finance, 800 Lancaster Avenue, Villanova, PA 19085, USA., Email: Michael.Pagano@villanova.edu

Publication date: 2004-12-01