Multiple Risky Securities Valuation

Abstract

In this paper we develop a statistical approach to valuation of a multiple names security portfolio. The goal of the paper to present pricing and calculation of the risk characteristics of the corporate debt based on randomization of historical data of the portfolio's assets. Our approach close but it does not coincide with the reduced form interpretation of the credit risk. First based on stochastic interpretation of the default event it follows that the price of the bond is a stochastic process. Thus market spot price implies risk and on the other hand this number reflects market presentiment of the right price including market drift and its volatility. We will show in details how default correlation within securities will affect the basket exposure.

Keywords: Multiple risky securities valuation, risky bond , default, CDOs valuation, copula