Hedging against Risk in a Heterogeneous Leveraged Market

Alexandros Karlis, Giorgos Galanis, Spyridon Terovitis and Matthew Turner

No 270010, Economic Research Papers 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: Financial; Economics (search for similar items in EconPapers)
Pages: 20
Date: 2015-12-12
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Persistent link: https://EconPapers.repec.org/RePEc:ags:uwarer:270010

DOI: 10.22004/ag.econ.270010

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