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Interest rate swaps and corporate default

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  • Urban J. Jermann
  • Vivian Z. Yue
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    Abstract

    This paper studies firms' usage of interest rate swaps to manage risk in a model economy driven by aggregate productivity shocks, inflation shocks, and counter-cyclical idiosyncratic productivity risk. Consistent with empirical evidence, firms in the model are fixed-rate payers, and swap positions are negatively correlated with the term spread. In the model, swaps affect firms' investment decisions and debt pricing very moderately, and the availability of swaps generates only small economic gains for the typical firm.

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    File URL: http://www.federalreserve.gov/pubs/ifdp/2013/1090/default.htm
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    File URL: http://www.federalreserve.gov/pubs/ifdp/2013/1090/ifdp1090.pdf
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    Bibliographic Info

    Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series International Finance Discussion Papers with number 1090.

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    Date of creation: 2013
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    Handle: RePEc:fip:fedgif:1090

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    1. Russell Cooper & Joao Ejarque, 2003. "Financial Frictions and Investment: Requiem in Q," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 6(4), pages 710-728, October.
    2. Sheridan Titman, 1990. "Interest rate swaps and corporate financing choices," Proceedings, Federal Reserve Bank of San Francisco, issue Nov.
    3. Chernenko, Sergey & Faulkender, Michael, 2011. "The Two Sides of Derivatives Usage: Hedging and Speculating with Interest Rate Swaps," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 46(06), pages 1727-1754, December.
    4. Myers, Stewart C., 1977. "Determinants of corporate borrowing," Journal of Financial Economics, Elsevier, vol. 5(2), pages 147-175, November.
    5. Barnea, Amir & Haugen, Robert A & Senbet, Lemma W, 1980. " A Rationale for Debt Maturity Structure and Call Provisions in the Agency Theoretic Framework," Journal of Finance, American Finance Association, vol. 35(5), pages 1223-34, December.
    6. Li, Haitao & Mao, Connie X., 2003. "Corporate use of interest rate swaps: Theory and evidence," Journal of Banking & Finance, Elsevier, vol. 27(8), pages 1511-1538, August.
    7. Smith, Clifford W. & Stulz, René M., 1985. "The Determinants of Firms' Hedging Policies," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 20(04), pages 391-405, December.
    8. Russell W. Cooper & John C. Haltiwanger, 2000. "On the Nature of Capital Adjustment Costs," NBER Working Papers 7925, National Bureau of Economic Research, Inc.
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