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Hedging parameter risk

Arndt Claußen, Daniel Rösch and Martin Schmelzle

Journal of Banking & Finance, 2019, vol. 100, issue C, 111-121

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.

Keywords: Estimation error; Parameter risk; Hedging (search for similar items in EconPapers)
JEL-codes: C13 G13 G32 (search for similar items in EconPapers)
Date: 2019
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Handle: RePEc:eee:jbfina:v:100:y:2019:i:c:p:111-121