Approximate Derivative Pricing for Large Classes of Homogeneous Assets with Systematic Risk
AbstractWe consider a homogeneous class of assets, whose returns are driven by an unobservable factorrepresenting systematic risk. We derive approximated pricing formulas for the future factor valuesand their proxies, when the size n of the class is large. Up to order 1=n, these closed form approximationsinvolve well-chosen summary statistics of the basic asset returns, but not the current andlagged factor values. The potential of the closed form approximation formulas seems quite large,especially for credit risk analysis, which considers large portfolios of individual loans or corporatebonds, and for longevity risk analysis, which involves large portfolios of life insurance contracts.
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Bibliographic InfoPaper provided by Centre de Recherche en Economie et Statistique in its series Working Papers with number 2010-07.
Date of creation: 2010
Date of revision:
Other versions of this item:
- Patrick Gagliardini & Christian Gouriéroux, 2011. "Approximate Derivative Pricing for Large Classes of Homogeneous Assets with Systematic Risk," Journal of Financial Econometrics, Society for Financial Econometrics, vol. 9(2), pages 237-280, Spring.
- NEP-ALL-2011-03-19 (All new papers)
- NEP-BAN-2011-03-19 (Banking)
- NEP-BEC-2011-03-19 (Business Economics)
- NEP-RMG-2011-03-19 (Risk Management)
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- Jean-David Fermanian, 2013. "The Limits of Granularity Adjustments," Working Papers 2013-27, Centre de Recherche en Economie et Statistique.
- M. B. Gordy & E. Lutkebohmert, 2013. "Granularity Adjustment for Regulatory Capital Assessment," International Journal of Central Banking, International Journal of Central Banking, vol. 9(3), pages 38-77, September.
- Michael B. Gordy & James Marrone, 2010.
"Granularity adjustment for mark-to-market credit risk models,"
Finance and Economics Discussion Series
2010-37, Board of Governors of the Federal Reserve System (U.S.).
- Gordy, Michael B. & Marrone, James, 2012. "Granularity adjustment for mark-to-market credit risk models," Journal of Banking & Finance, Elsevier, vol. 36(7), pages 1896-1910.
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