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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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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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Authors and Affiliations

  1. Villanova University, College of Commerce and Finance, 800 Lancaster Avenue, Villanova, PA, 19085, USA.

    Michael S. Pagano

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  1. Michael S. Pagano
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Pagano, M.S. Using an Alternative Estimation Method to Perform Comprehensive Empirical Tests: An Application to Interest Rate Risk-Management. Review of Quantitative Finance and Accounting 23, 377–406 (2004). https://doi.org/10.1023/B:REQU.0000049322.82965.cc

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  • DOI: https://doi.org/10.1023/B:REQU.0000049322.82965.cc

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