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Granularity Adjustment for Efficient Portfolios

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  • C. Gourieroux
  • A. Monfort

Abstract

This article considers large portfolios of assets submitted to both systematic and unsystematic (or idiosyncratic) risks. The idiosyncratic risks can be fully diversified if the portfolio size is infinite, but only partly diversified otherwise. The granularity adjustment measures the effect of partly diversifying idiosyncratic risks. We derive the granularity adjustments for a portfolio with naive diversification and for the efficient mean-variance portfolio allocation. We consider in particular the Sharpe performances, with and without short-sale restrictions and we highlight the effect of concentration risk.

Suggested Citation

  • C. Gourieroux & A. Monfort, 2013. "Granularity Adjustment for Efficient Portfolios," Econometric Reviews, Taylor & Francis Journals, vol. 32(4), pages 449-468, December.
    • Handle: RePEc:taf:emetrv:v:32:y:2013:i:4:p:449-468
    DOI: 10.1080/07474938.2012.690667
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    References listed on IDEAS

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    1. Giannone, Domenico & De Mol, Christine & Daubechies, Ingrid & Brodie, Joshua, 2007. "Sparse and Stable Markowitz Portfolios," CEPR Discussion Papers 6474, C.E.P.R. Discussion Papers.
    2. Lütkebohmert, Eva & Gordy, Michael B., 2007. "Granularity adjustment for Basel II," Discussion Paper Series 2: Banking and Financial Studies 2007,01, Deutsche Bundesbank.
    3. Marc Gürtler & Dirk Heithecker & Martin Hibbeln, 2008. "Concentration Risk under Pillar 2: When are Credit Portfolios Infinitely Fine Grained?," Credit and Capital Markets, Credit and Capital Markets, vol. 41(1), pages 79-124.
    4. Gourieroux,Christian & Monfort,Alain, 1995. "Statistics and Econometric Models," Cambridge Books, Cambridge University Press, number 9780521405515.
    5. Pesaran, M.H. & Zaffaroni, P., 2008. "Optimal Asset Allocation with Factor Models for Large Portfolios," Cambridge Working Papers in Economics 0813, Faculty of Economics, University of Cambridge.
    6. Gourieroux,Christian & Monfort,Alain, 1995. "Statistics and Econometric Models 2 volume set," Cambridge Books, Cambridge University Press, number 9780521478373, July.
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