Looking for the right copula
One naturally is led to argue that the valuation of products involving basketsof credits, such as single-tranche collateralised debt obligations, should bedetermined from the joint returns on a basket of assets, which in turn can beinferred from baskets of equities. For derivatives directly linked to equitybaskets, such as index options, the correlation between components implied bythe market can be directly compared with historical estimates, permitting a fairvaluation approach to these
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