Hedging against Risk in a Heterogeneous Leveraged Market

Alexandros Karlis, Giorgos Galanis, Spyridon Terovitis and Matthew Turner
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Alexandros Karlis: Department of Physics University of Warwick
Spyridon Terovitis: Department of Economics University of Warwick

The Warwick Economics Research Paper Series (TWERPS) from University of Warwick, Department of Economics

Abstract: This paper focuses on the use of interest rates as a tool for hedging against the default risk of heterogeneous hedge funds (HFs) in a leveraged market. We assume that the banks study the HFs survival statistics in order to compute default risk and hence the correct interest rate. The emergent non-trivial (heavy-tailed) statistics observed on the aggregate level, prevents the accurate estimation of risk in a leveraged market with heterogeneous agents. Moreover, we show that heterogeneity leads to the clustering of default events and constitutes thus a source of systemic risk.

Keywords: survival statistics; interest rate; leverage; financial fragility. (search for similar items in EconPapers)
JEL-codes: G23 G24 G32 G33 (search for similar items in EconPapers)
Date: 2015
New Economics Papers: this item is included in nep-cfn and nep-rmg
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https://warwick.ac.uk/fac/soc/economics/research/w ... werp_1084_karlis.pdf

Related works:
Working Paper: Hedging against Risk in a Heterogeneous Leveraged Market (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:wrk:warwec:1084

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