Granularity Theory with Applications to Finance and Insurance

This book provides the first comprehensive overview of the granularity theory and its usefulness for risk analysis, statistical estimation, and derivative pricing.

Patrick Gagliardini (Author), Christian Gouriéroux (Author)

9781107070837, Cambridge University Press

Hardback, published 6 October 2014

202 pages, 36 b/w illus. 12 tables
23.5 x 15.7 x 1.5 cm, 0.42 kg

'Gagliardini and Gouriéroux consolidate and advance the past decade's developments in analysis of portfolios of not-quite-asymptotic size. This unique monograph offers a variety of risk management, econometric and derivative pricing applications in a clear and unified framework.' Michael Gordy

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.

1. The standard asymptotic theorems and their limitations
2. Gaussian static factor
3. Static qualitative factor model
4. Nonlinear dynamic panel-data model
5. Prediction and basket derivative pricing
6. Granularity for risk measures.

Subject Areas: Optimization [PBU], Insurance & actuarial studies [KFFN], Finance [KFF], Econometrics [KCH], Economics [KC]