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

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  • Patrick Gagliardini
  • Christian Gouriéroux

Abstract

We consider a homogeneous class of assets, whose returns are driven by an unobservable factor representing systematic risk. We derive approximated pricing formulas for the future factor values and their proxies, when the size n of the class is large. Up to order 1/n, these closed-form approximations involve well-chosen summary statistics of the basic asset returns but not the current and lagged 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 corporate bonds, and for longevity risk analysis, which involves large portfolios of life insurance contracts. Copyright The Author 2011. Published by Oxford University Press. All rights reserved. For Permissions, please e-mail: journals.permissions@oup.com., Oxford University Press.

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  • Patrick Gagliardini & Christian Gouriéroux, 2011. "Approximate Derivative Pricing for Large Classes of Homogeneous Assets with Systematic Risk," Journal of Financial Econometrics, Oxford University Press, vol. 9(2), pages 237-280, Spring.
    • Handle: RePEc:oup:jfinec:v:9:y:2011:i:2:p:237-280
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    1. 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.
    2. 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.
    3. Fermanian, Jean-David, 2014. "The limits of granularity adjustments," Journal of Banking & Finance, Elsevier, vol. 45(C), pages 9-25.
    4. Jean-David Fermanian, 2013. "The Limits of Granularity Adjustments," Working Papers 2013-27, Center for Research in Economics and Statistics.
    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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