Risk Management and Data Quality Selection: An Information Economics Approach

Abstract

Data quality has been shown to be a major determinant of the value of systems that utilizeinput data feeds and transform them into valuable information under a variety of businesscontexts. For this study, we have chosen a financial risk management context to investigatethe relationship between data quality and value of risk management forecasting systems.Three attributes of data quality, frequency, response time, and accuracy, along with the costof data are considered. Joint impacts of attributes are also considered. It is shown that anincrease in report frequency results in an increase in the utility of a risk managementforecasting system, but this increase is limited by the responsiveness of the hedging scheme.Frequency is shown to improve the utility of the forecasting systems in two ways: First, anincrease in frequency pushes the predicted states closer to the actual states and second, anincrease in frequency causes the reliability of the forecasting model to increase. A delay inresponse time of reports is predicted to have a greater impact on utility for high frequencyreports than for low frequency reports. Finally, data inaccuracies are recommended to be thefirst concern of a portfolio manager before an attempt is made to increase the reportingfrequency.