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Approximate Derivative Pricing for Large Classes of Homogeneous Assets with Systematic Risk

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  • Patrick GAGLIARDINI

    (Crest)

  • Christian GOURIEROUX

    (Crest)

Abstract

We 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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  • Patrick GAGLIARDINI & Christian GOURIEROUX, 2010. "Approximate Derivative Pricing for Large Classes of Homogeneous Assets with Systematic Risk," Working Papers 2010-07, Center for Research in Economics and Statistics.
    • Handle: RePEc:crs:wpaper:2010-07
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    Cited by:

    1. Fermanian, Jean-David, 2014. "The limits of granularity adjustments," Journal of Banking & Finance, Elsevier, vol. 45(C), pages 9-25.
    2. Jean-David Fermanian, 2013. "The Limits of Granularity Adjustments," Working Papers 2013-27, Center for Research in Economics and Statistics.
    3. 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.
    4. 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.
    5. Serge Darolles & Christian Gouriéroux & Emmanuelle Jay, 2012. "Robust Portfolio Allocation with Systematic Risk Contribution Restrictions," Working Papers 2012-35, Center for Research in Economics and Statistics.

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