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On Dynamic Risk Management - Investigating the Theory of Collateral Constraints

Bladlund, Linus LU and Andersson, Erik LU (2017) NEKP03 20171
Department of Economics
Abstract (Swedish)
This paper investigates the theory of collateral constraints developed by Rampini, Sufi, and Viswanathan in their paper Dynamic Risk Management published in 2014. In this theoretical framework, firms are faced with a trade-off between using scarce cash holdings to finance investments and engaging in risk management. Using an updated dataset covering a tumultuous time-period in which oil prices fell dramatically, we employ a wide range of statistical models, including difference-in-differences estimations, to test the validity of this theory in the North American oil and gas industry. Our results are not completely unanimous, but after having analyzed them in detail we can conclude that more financially unconstrained firms tend to hedge... (More)
This paper investigates the theory of collateral constraints developed by Rampini, Sufi, and Viswanathan in their paper Dynamic Risk Management published in 2014. In this theoretical framework, firms are faced with a trade-off between using scarce cash holdings to finance investments and engaging in risk management. Using an updated dataset covering a tumultuous time-period in which oil prices fell dramatically, we employ a wide range of statistical models, including difference-in-differences estimations, to test the validity of this theory in the North American oil and gas industry. Our results are not completely unanimous, but after having analyzed them in detail we can conclude that more financially unconstrained firms tend to hedge more than constrained firms. In addition, as oil prices fell dramatically in the last months of 2014 resulting in widespread financial distress, constrained firms generally responded by decreasing their hedging even more. Ultimately, based on the results from the statistical models and the subsequent analysis, we are in a position to support, though not completely, the theory of collateral constraints. (Less)
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author
Bladlund, Linus LU and Andersson, Erik LU
supervisor
organization
course
NEKP03 20171
year
type
H2 - Master's Degree (Two Years)
subject
keywords
Collateral, Financial Constraints, Oil and Gas Industry, Risk Management
language
English
id
8914471
date added to LUP
2017-06-13 14:46:09
date last changed
2017-06-13 14:46:09
@misc{8914471,
  abstract     = {This paper investigates the theory of collateral constraints developed by Rampini, Sufi, and Viswanathan in their paper Dynamic Risk Management published in 2014. In this theoretical framework, firms are faced with a trade-off between using scarce cash holdings to finance investments and engaging in risk management. Using an updated dataset covering a tumultuous time-period in which oil prices fell dramatically, we employ a wide range of statistical models, including difference-in-differences estimations, to test the validity of this theory in the North American oil and gas industry. Our results are not completely unanimous, but after having analyzed them in detail we can conclude that more financially unconstrained firms tend to hedge more than constrained firms. In addition, as oil prices fell dramatically in the last months of 2014 resulting in widespread financial distress, constrained firms generally responded by decreasing their hedging even more. Ultimately, based on the results from the statistical models and the subsequent analysis, we are in a position to support, though not completely, the theory of collateral constraints.},
  author       = {Bladlund, Linus and Andersson, Erik},
  keyword      = {Collateral,Financial Constraints,Oil and Gas Industry,Risk Management},
  language     = {eng},
  note         = {Student Paper},
  title        = {On Dynamic Risk Management - Investigating the Theory of Collateral Constraints},
  year         = {2017},
}