Valuing a portfolio of dependent RandD projects: a Copula approach

Gea Cayetano

MPRA Paper from University Library of Munich, Germany

Abstract: The aim of this work consists of pricing a real biotechnology firm that is based on a portfolio of several drug development projects at different phases. Duffie and Singleton (1999) formulate a system of n correlated jump mean-reverting intensity equations to capture a portfolio of n entities’ default times. The drawback of their approach is that there are a lot of parameters and we have no enough information so as to estimate all. This is the reason why the copula approach has been very well accepted in recent years as an alternative tool for these situations since we can model the extreme situations (or default in this case) under a dependence framework by selecting those copula functions with a very few number of parameters.

Keywords: Copula; valuation; company; real options (search for similar items in EconPapers)
JEL-codes: C00 (search for similar items in EconPapers)
Date: 2006
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