Interest rate derivatives use in banking: Market pricing implications of cash flow hedges

Aigbe Akhigbe, Stephen Makar, Li Wang and Ann Marie Whyte

Journal of Banking & Finance, 2018, vol. 86, issue C, 113-126

Abstract: We examine whether investors are able to fully anticipate the pricing implications of cash flow hedges in the banking industry. We show that mark-to-market adjustments on cash flow hedges are inversely related to future cash flows and that investors underestimate the extent of this inverse relation. Our evidence supports the notion that incomplete information on value relevant parameters makes it difficult for investors to accurately predict the effects of current cash flow hedge adjustments on future cash flows. Our results are also consistent with the evidence that investors have limited attention such that information, particularly information that is difficult to discern, is not fully reflected in stock prices. Thus, the additional disclosures mandated by regulatory agencies in the banking industry are not sufficient to overcome the challenges associated with incomplete information and investors’ limited attention.

Keywords: Interest rate derivatives; Cash flow hedges; Mark-to-market adjustments; Incomplete information; Investors’ limited attention (search for similar items in EconPapers)
JEL-codes: G14 G21 M41 (search for similar items in EconPapers)
Date: 2018
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:86:y:2018:i:c:p:113-126

DOI: 10.1016/j.jbankfin.2017.09.009

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