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

Patrick Gagliardini () and Christian Gourieroux

No 2010-07, Working Papers from Center for Research in Economics and Statistics

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.

Date: 2010
New Economics Papers: this item is included in nep-ban, nep-bec and nep-rmg
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Journal Article: Approximate Derivative Pricing for Large Classes of Homogeneous Assets with Systematic Risk (2011)
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