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

Michael S. Pagano ()

Review of Quantitative Finance and Accounting, 2004, vol. 23, issue 4, 377-406

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.

Date: 2004
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