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Increasing the risk management effectiveness from higher accuracy: A novel non-parametric method

Jinbo Huang, Ashley Ding, Yong Li and Dong Lu

Pacific-Basin Finance Journal, 2020, vol. 62, issue C

Abstract: The importance of effective risk management has never been greater in recent decades. However, the estimate accuracy of risk measures, such as Value-at-Risk, remains a challenge. In this paper, we propose a novel non-parametric method to efficiently enhance the accuracy of risk estimation as our method can avoid model misspecification and fully explore the tail information contained in asset returns. The non-parametric Value-at-Risk measure is embedded into a risk hedge model to increase the effectiveness of risk management. Simulations show that our new method outperforms existing methods in terms of accuracy. Empirical findings support that the improved estimation is helpful for more effectively managing risk in weather-sensitive markets.

Keywords: Risk hedge; Value-at-Risk; Non-parametric estimation; Weather-sensitive markets (search for similar items in EconPapers)
JEL-codes: C14 C15 C61 G11 G23 (search for similar items in EconPapers)
Date: 2020
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DOI: 10.1016/j.pacfin.2020.101373

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