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Optimal hedging strategy for risk management on a network
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Gao, Tianjiao, Gupta, Aparna, Gulpinar, Nalan and Zhu, Yun (2015) Optimal hedging strategy for risk management on a network. Journal of Financial Stability, 16 . pp. 31-44. doi:10.1016/j.jfs.2014.10.005 ISSN 1572-3089.
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Official URL: http://dx.doi.org/10.1016/j.jfs.2014.10.005
Abstract
The paper develops a network-based framework to assess the impact of a firm's financial interconnections and interdependencies on it optimal hedging and risk transfer strategy. This is important consideration as risk concentrations and propagation embedded in risk transfers pose as a significant challenge for financial regulations and risk management. Using an a priori and an a posteriori analysis, we investigate the impact of the network structure on optimal hedge decisions and hedge efficacy. The a priori analysis shows that network features play an important role in determining corporate hedging decisions through their impact on hedge costs. In the a posteriori analysis for counterparty risk, benefit of modification from the a priori optimal hedge decision is realized when variance of firm value matters, but not when tail risk measures are utilized. Financial network assessment indicates that an a priori analysis is insufficient for robust hedging decisions, and choice of risk measures behind risk management objectives dictates the extent of impact of network characteristics.
Item Type: | Journal Article | ||||||||
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Divisions: | Faculty of Social Sciences > Warwick Business School > Operational Research & Management Sciences Faculty of Social Sciences > Warwick Business School |
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Journal or Publication Title: | Journal of Financial Stability | ||||||||
Publisher: | Elsevier Inc. | ||||||||
ISSN: | 1572-3089 | ||||||||
Official Date: | February 2015 | ||||||||
Dates: |
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Volume: | 16 | ||||||||
Page Range: | pp. 31-44 | ||||||||
DOI: | 10.1016/j.jfs.2014.10.005 | ||||||||
Status: | Peer Reviewed | ||||||||
Publication Status: | Published | ||||||||
Access rights to Published version: | Restricted or Subscription Access |
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