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Corporate hedging fragility in the over-the-counter market

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  • Calluzzo, Paul
  • Dudley, Evan

Abstract

We study the effects of a derivatives supply shock on corporate hedging based on counterparty derivative provision in the Over-the-Counter market. We find that corporate hedging programs are fragile. When a firm’s counterparty in derivative transactions suffers losses on its loan portfolio, the firm is more likely to lose access to this type of hedging. Affected firms respond by increasing their savings rate and preserving access to corporate lines of credit. These results are not present in a counterfactual experiment that involves capital shocks to the firm’s lenders who do not act as counterparties in over-the-counter derivative transactions.

Suggested Citation

  • Calluzzo, Paul & Dudley, Evan, 2022. "Corporate hedging fragility in the over-the-counter market," Journal of Empirical Finance, Elsevier, vol. 67(C), pages 253-270.
    • Handle: RePEc:eee:empfin:v:67:y:2022:i:c:p:253-270
    DOI: 10.1016/j.jempfin.2022.04.003
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    More about this item

    Keywords

    Corporate hedging; Risk management; Derivative supply shock; Financial crisis; OTC markets;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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