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Tail risk spillovers and corporate cash holdings

Author

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  • Chiu, Wan-Chien
  • Wang, Chih-Wei
  • Peña, Juan Ignacio

Abstract

This paper investigates tail risk spillovers from the financial sector to real economy firms in the United States and the United Kingdom from 2003 to 2011. We measure these spillovers by evaluating the number of joint occurrences of extreme negative returns in a nonfinancial firm conditional on an extreme negative return in the financial sector. Such spillovers increased dramatically in the 2007–2009 crisis. We also examine whether cash holdings act as a buffer in mitigating these spillovers. Our results indicate that greater cash holdings are associated with lower levels of tail risk spillovers for financially constrained firms and more strongly so among constrained firms with high hedging needs and no ratings (i.e., firms with restricted external financing sources). Overall, our findings support the view that the greater cash holdings of constrained firms act as a shock absorber against costly external financing.

Suggested Citation

  • Chiu, Wan-Chien & Wang, Chih-Wei & Peña, Juan Ignacio, 2016. "Tail risk spillovers and corporate cash holdings," Journal of Multinational Financial Management, Elsevier, vol. 36(C), pages 30-48.
  • Handle: RePEc:eee:mulfin:v:36:y:2016:i:c:p:30-48
    DOI: 10.1016/j.mulfin.2016.07.001
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    References listed on IDEAS

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    More about this item

    Keywords

    Tail risk spillover; Conditional coexceedance; Cash holdings; Financial constraints; Financial crisis;

    JEL classification:

    • G00 - Financial Economics - - General - - - General
    • G01 - Financial Economics - - General - - - Financial Crises
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • C36 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Instrumental Variables (IV) Estimation

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