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Granularity Theory with Application to Finance and Insurance

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  • Christian Gouriéroux

    (CREST, University of Toronto)

  • University of Lugano

Abstract

The recent financial crisis has heightened the need for appropriate methodologies for managing and monitoring complex risks in financial markets. The measurement, management, and regulation of risks in portfolios composed of credits, credit derivatives, or life insurance contracts is difficult because of the nonlinearities of risk models, dependencies between individual risks, and the several thousands of contracts in large portfolios. The granularity principle was introduced in the Basel regulations for credit risk to solve these difficulties in computing capital reserves. In this book, authors Patrick Gagliardini and Christian Gouriéroux provide the first comprehensive overview of the granularity theory and illustrate its usefulness for a variety of problems related to risk analysis, statistical estimation, and derivative pricing in finance and insurance. They show how the granularity principle leads to analytical formulas for risk analysis that are simple to implement and accurate even when the portfolio size is large.
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Suggested Citation

  • Christian Gouriéroux & University of Lugano, 2011. "Granularity Theory with Application to Finance and Insurance," Working Papers 2011-22, Center for Research in Economics and Statistics.
    • Handle: RePEc:crs:wpaper:2011-22
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    File URL: http://crest.science/RePEc/wpstorage/2011-22.pdf
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    Cited by:

    1. Laurent Barras & Patrick Gagliardini & Olivier Scaillet, 2022. "Skill, Scale, and Value Creation in the Mutual Fund Industry," Journal of Finance, American Finance Association, vol. 77(1), pages 601-638, February.
    2. Gagliardini, Patrick & Gouriéroux, Christian, 2017. "Double instrumental variable estimation of interaction models with big data," Journal of Econometrics, Elsevier, vol. 201(2), pages 176-197.

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