Delta-hedging correlation risk?

While the Gaussian copula model is commonly used as a static quotation device for CDO tranches, its use for hedging is questionable. In particular, the spread delta computed from the Gaussian copula model assumes constant base correlations, whereas we show that the correlations are dynamic and correlated to the index spread. It might therefore be expected that a dynamic model of credit risk, which is able to capture the dependence between the base correlations and the index spread, will have better hedging performances. In this paper, we compare delta hedging of spread risk based on the Gaussian copula model, to the implementation of jump-to-default ratio computed from the dynamic local intensity model. Theoretical and empirical analysis are illustrated by using the market data in both before and after the subprime crisis. We observe that delta hedging of spread risk outperforms the implementation of jump-to-default ratio in the pre-crisis period associated with CDX.NA.IG series 5, and the two strategies have comparable performance for crisis period associated with CDX.NA.IG series 9 and 10. This shows that, although the local intensity model is a dynamic model, it is not sufficient to explain the joint dynamic of the index spread and the base correlations, and a richer dynamic model is required to obtain better hedging results. Moreover, although different specifications of the local intensity can be fitted to the market data equally well, their hedging results can be significant different. This reveals substantial model risk when hedging CDO tranches.     

Risk perception of mobile communication: a mental models approach

Some lay people confronted with a new base station project fear serious health consequences from the high‐frequency radiation, while experts consider exposure under the current international standards as unproblematic. These conflictive estimations may be attributed to the different mental models of lay people and experts. Less is known about lay people’s knowledge in regard to mobile communication and their intuitive understanding of the associated health risks. An adaptation of the ‘Mental Models Approach’ was used to reveal lay people’s beliefs about mobile communication and to learn more about lay people’s information requirements, potential knowledge gaps, and misconceptions. Through the means of open interviews with Swiss experts (N = 16), lay people (N = 16), and base station opponents (N = 15), different mental models were constructed and evaluated. Comparisons between the expert and the lay groups showed several qualitative differences in all identified knowledge domains. Knowledge gaps in regard to changing exposure magnitudes due to the interaction patterns of cell phones and base stations as well as misconceptions about regulation issues and scientific processes were found in both lay groups. In addition, lack of trust in responsible actors and disaffection with base station location processes were mentioned. The reported qualitative insights may be useful for the improvement of further risk communication tools.     

The impact of specific information provision on base station siting preferences

When it comes to the new siting of a mobile communication base station in one’s neighbourhood, some people react with rejection because they fear health consequences from the emitted high‐frequency radiation. Most people would prefer to site base stations outside residential areas, but from a public health perspective, this may result in even more radiation for the phoning population. Therefore, authorities are interested in improving the current base station siting processes. The question arises whether specific knowledge enhancement would influence base station siting preferences or whether affective or emotional components (due to the scientific uncertainties involved) would overrule the influence of such attempts. To answer this question, an experimental study with a convenience sample of Swiss citizens (N = 228) was conducted. Participants were confronted with one of three texts: a neutral text (control group), an information booklet about mobile communication and an emotionally charged newspaper article that reported a conflict about the siting of a new base station. After reading the text, participants filled out a questionnaire about their perception of mobile communication and their base station siting preferences. Reading the information booklet increased participants’ knowledge and led to some perceptual changes of base stations and mobile phones. Importantly, participants reading the booklet were able to transfer their knowledge to a base station siting task and found locations that would emit less radiation for the phoning population. Implications and limitations of these results are discussed.