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Dynamic risk management

Amaya, Diego, Gauthier, Geneviève and Léautier, Thomas-Olivier (2015) Dynamic risk management: investment, capital structure, and hedging in the presence of financial frictions. Journal of Risk and Insurance, vol. 82 (n° 2). pp. 359-399.

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Identification Number : 10.1111/jori.12025


This article develops a dynamic risk management model to determine a firm's optimal risk management strategy. This strategy has two elements. First, for low-leverage values, the firm fully hedges its operating cash flow exposure, due to the convexity of its cost of capital. When leverage exceeds a very high threshold, the firm gambles for resurrection and stops hedging. Second, the firm manages its capital structure through dividend distributions and investment. When leverage is low, the firm replaces depreciated assets, fully invests in opportunities if they arise, and distribute dividends, all of these together to achieve its optimal capital structure. As leverage increases, the firm stops paying dividends, while fully investing. After a certain leverage, the firm also reduces investment until it stops investing completely. The model predictions are consistent with empirical observations

Item Type: Article
Sub-title: investment, capital structure, and hedging in the presence of financial frictions.
Language: English
Date: June 2015
Refereed: Yes
Uncontrolled Keywords: Hedging (Finance), Capital costs, investments, Capital structure, Financial risk management
JEL Classification: C61 - Optimization Techniques; Programming Models; Dynamic Analysis
G32 - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure
C- GESTION > C4- Management
C- GESTION > C6- Stratégie
Divisions: TSE-R (Toulouse), TSM Research (Toulouse)
Site: UT1
Date Deposited: 16 Mar 2015 14:40
Last Modified: 02 Apr 2021 15:49
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