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Hedging against risk in a heterogeneous leveraged market
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Karlis, Alexandros, Galanis, Giorgos, Terovitis, Spyridon and Turner, Matthew S. (2015) Hedging against risk in a heterogeneous leveraged market. Working Paper. Coventry: University of Warwick. Department of Economics. Warwick economics research papers series (WERPS) (1084). (Unpublished)
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Official URL: https://www2.warwick.ac.uk/fac/soc/economics/resea...
Abstract
This paper provides a theoretical model which highlights the role of heterogeneity of information in the emergence of temporal aggregation (clustering) of defaults in a leveraged economy. We show that the degree of heterogeneity plays a critical role in the persistence of the correlation between defaults in time. Specifically, a high degree of heterogeneity leads to an autocorrelation of the time sequence of defaults characterised by a hyperbolic decay rate, such that the autocorrelation function is not summable (infinite memory) and defaults are clustered. Conversely, if the degree of heterogeneity is reduced the autocorrelation function decays exponentially fast, and thus, correlation between defaults is only transient (short memory). Our model is also able to reproduce stylized facts, such as clustered volatility and non-Normal returns. Our findings suggest that future regulations might be directed at improving publicly available information, reducing the relative heterogeneity.
| Item Type: | Working or Discussion Paper (Working Paper) | ||||
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| Subjects: | H Social Sciences > HB Economic Theory | ||||
| Divisions: | Faculty of Science > Centre for Complexity Science Faculty of Social Sciences > Economics Faculty of Science > Physics |
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| Library of Congress Subject Headings (LCSH): | Hedge funds, Interest rates | ||||
| Series Name: | Warwick economics research papers series (WERPS) | ||||
| Publisher: | University of Warwick. Department of Economics | ||||
| Place of Publication: | Coventry | ||||
| ISSN: | 0083-7350 | ||||
| Official Date: | December 2015 | ||||
| Dates: |
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| Number: | 1084 | ||||
| Number of Pages: | 19 | ||||
| Institution: | University of Warwick | ||||
| Status: | Not Peer Reviewed | ||||
| Publication Status: | Unpublished |
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