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Hedging parameter risk

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  • Claußen, Arndt
  • Rösch, Daniel
  • Schmelzle, Martin

Abstract

The accurate measurement and effective control of financial risk are of crucial importance to risk managers and regulators. However, risk measures are potentially affected by errors in the estimation of model parameters from limited samples, leading to parameter risk. The key contribution of this paper is the formulation of a general framework to hedge this parameter risk. Applying the new framework to credit portfolio modeling, we highlight the importance of parameter risk, estimation methods, and diversification effects.

Suggested Citation

  • Claußen, Arndt & Rösch, Daniel & Schmelzle, Martin, 2019. "Hedging parameter risk," Journal of Banking & Finance, Elsevier, vol. 100(C), pages 111-121.
    • Handle: RePEc:eee:jbfina:v:100:y:2019:i:c:p:111-121
    DOI: 10.1016/j.jbankfin.2019.01.003
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    More about this item

    Keywords

    Estimation error; Parameter risk; Hedging;
    All these keywords.

    JEL classification:

    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • 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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