TY - JOUR
T1 - Increasing the risk management effectiveness from higher accuracy
T2 - A novel non-parametric method
AU - Huang, Jinbo
AU - Ding, Ashley
AU - Li, Yong
AU - Lu, Dong
PY - 2020/9
Y1 - 2020/9
N2 - 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.
AB - 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.
KW - Risk hedge
KW - Value-at-Risk
KW - Non-parametric estimation
KW - Weather-sensitive markets
UR - http://www.scopus.com/inward/record.url?scp=85087051268&partnerID=8YFLogxK
U2 - 10.1016/j.pacfin.2020.101373
DO - 10.1016/j.pacfin.2020.101373
M3 - Article
SN - 0927-538X
VL - 62
SP - 1
EP - 15
JO - Pacific-Basin Finance Journal
JF - Pacific-Basin Finance Journal
IS - 101373
M1 - 101373
ER -