Granularity Theory with Applications to Finance and Insurance

Description

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 Gourieroux 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.

Patrick Gagliardini is full Professor of Econometrics at Universita della Svizzera italiana, Lugano, Switzerland. He graduated from the ETH in Zurich with a degree in physics in 1998 and received his PhD in economics from the University of Lugano in 2003. He has also held a position of assistant professor at the University of St Gallen. His research interests lie in econometrics and financial econometrics and focus especially on large-scale factor models, credit risk, asset pricing, and semi- and non-parametric methods. He is coauthor of research articles published in Econometrica, the Review of Financial Studies, the Journal of Econometrics, and Econometric Theory. Christian Gourieroux is director of the Laboratory of Finance and Insurance at the Center for Research in Economics and Statistics (CREST) in Paris and professor at the University of Toronto. He has published numerous papers on both theoretical and applied econometrics, with a special emphasis on credit, finance, insurance, and systemic risk. He is the coauthor of Statistics and Econometric Models and Time Series and Dynamic Models, both published by Cambridge University Press, and of Financial Econometrics and Econometrics of Individual Risks. He has also received the Tjalling C. Koopmans Econometric Theory Prize. Gourieroux was scientific adviser for credit scoring and implementation of Basel regulation at BNP Paribas. He is a member of the scientific committees of the French Financial Market Authority and the Prudential Supervision and Resolution Authority.

'Credible portfolio risk assessment requires financial-econometric methods that respect the limitations of finite samples (finite numbers of assets) in real portfolios. Gagliardini and Gourieroux propose and explore asymptotic expansions (granularity adjustments) that do just that. As expected, their book displays a wonderful clarity of thought and will be highly valued in academic, policy and practitioner circles.' Francis X. Diebold, Paul F. and Warren S. Miller Professor of Economics, University of Pennsylvania 'The global financial crisis provided a stunning revelation of the complex interdependencies of risks in the banking sector and far beyond. This book provides a much-needed comprehensive study of the granularity principle designed to tackle the analysis of highly nonlinear risks imbedded in portfolios of credits or life insurance contracts. It is a timely and extremely important contribution.' Eric Ghysels, Edward Bernstein Professor of Economics and Professor of Finance, University of North Carolina, Chapel Hill 'Gagliardini and Gourieroux 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