Marking Systemic Portfolio Risk with Application to the Correlation Skew of Equity Baskets

The downside risk of a portfolio of (equity)assets is generally substantially higher than the downside risk of its components. In particular in times of crises when assets tend to have high correlation, the understanding of this difference can be crucial in managing systemic risk of a portfolio. In this paper we generalize Merton's option formula in the presence jumps to the multi-asset case. It is shown how common jumps across assets provide an intuitive and powerful tool to describe systemic r...