Is hedging successful at reducing financial risk exposure?

Maria João Jorge and Mário Gomes Augusto

Applied Economics, 2016, vol. 48, issue 39, 3695-3713

Abstract: This article analyses whether firms use risk management instruments for hedging or speculative purposes. First, by analysing the relationship between the firm’s stock returns and financial risks in 567 Euronext firms, we measure the firm’s exposure to risk. Next, we investigate the effect of hedging in such exposures, addressing simultaneously the endogeneity of hedging decision through a treatment effect methodology. We have found that firms in our sample display higher percentages of exposure, when weighed against preceding studies, and confirmed that hedging reduces the level of the underlying financial exposure, concluding that firms use risk management instruments with hedging purposes.

Date: 2016
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DOI: 10.1080/00036846.2016.1142663

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