Portfolio Choice with Market--Credit-Risk Dependencies
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Abstract: We study an optimal investment/consumption problem in a model capturing market and credit risk dependencies. Stochastic factors drive both the default intensity and the volatility of the stocks in the portfolio. We use the martingale approach and analyze the recursive system of nonlinear Hamilton-Jacobi-Bellman equations associated with the dual problem. We transform such a system into an equivalent system of semi-linear PDEs, for which we establish existence and uniqueness of a bounded global classical solution. We obtain explicit representations for the optimal strategy, consumption path and wealth process, in terms of the solution to the recursive system of semi-linear PDEs. We numerically analyze the sensitivity of the optimal investment strategies to risk aversion, default risk and volatility.
Recommendations
- Portfolio optimization under credit risk
- Portfolio Optimization for Credit-Risky Assets under Marshall–Olkin Dependence
- Credit portfolio selection with decaying contagion intensities
- Optimal portfolio and consumption selection with default risk
- Asset proportions in optimal portfolios with dependent default risks
- Portfolio choices and VaR constraint with a defaultable asset
- A portfolio choice problem under risk capacity constraint
- Modeling portfolio optimization problem by probability-credibility equilibrium risk criterion
- Risk-sensitive credit portfolio optimization under partial information and contagion risk
- Portfolio Choices in the Presence of Other Risks
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Cited in
(18)- Credit portfolio risk and asset price cycles
- Portfolio optimization under credit risk
- Risk-sensitive credit portfolio optimization under partial information and contagion risk
- Pandemic portfolio choice
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- Asset proportions in optimal portfolios with dependent default risks
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