GAGLIARDINI Patrick

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"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".

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In this paper we examine the dependence between the liquidation risks of individual hedge funds. This dependence can result either from common exogenous shocks (shared frailty), or from contagion phenomena, which occur when an endogenous behaviour of a fund manager impacts the Net Asset Values of other funds. We introduce dynamic models able to distinguish between frailty and contagion phenomena, and test for the presence of such dependence effects, according to the age and management style of the fund. We demonstrate the empirical relevance of our approach by measuring the magnitudes of contagion and exogenous frailty in liquidation risk dependence in the TASS database. The empirical analysis is completed by stress-tests on portfolios of hedge funds.