Dynamic portfolio optimization with looping contagion risk

DOI10.1137/17M1154424MaRDI QIDQ5742492zbMATH OpenWikidataFDO

Authors Longjie Jia, Martijn R. Pistorius, Harry Zheng

Publication date 14 May 2019

Published in SIAM Journal on Financial Mathematics (Search for Journal in Brave)

Full work available at URL https://arxiv.org/abs/1710.05168

zbMATH Keywords

dynamic portfolio optimizationHJB equationlooping contagion riskrobust testsstatistical comparisonsviscosity solution

Mathematics Subject Classification ID

PDEs in connection with game theory, economics, social and behavioral sciences (35Q91) Viscosity solutions to Hamilton-Jacobi equations in optimal control and differential games (49L25) Portfolio theory (91G10) Optimal stochastic control (93E20)

Abstract: In this paper we consider a utility maximization problem with defaultable stocks and looping contagion risk. We assume that the default intensity of one company depends on the stock prices of itself and other companies, and the default of the company induces immediate drops in the stock prices of the surviving companies. We prove that the value function is the unique viscosity solution of the HJB equation. We also perform some numerical tests to compare and analyse the statistical distributions of the terminal wealth of log utility and power utility based on two strategies, one using the full information of intensity process and the other a proxy constant intensity process.

Recommendations

• Risk-sensitive asset management and cascading defaults
• Optimal portfolio and consumption selection with default risk
• Risk sensitive portfolio optimization with default contagion and regime-switching
• Optimal investment in credit derivatives portfolio under contagion risk
• Portfolio optimization in a defaultable market under incomplete information

Cites work

• An optimal portfolio problem in a defaultable market
• Continuous-time stochastic control and optimization with financial applications
• Counterparty credit risk, collateral and funding. With pricing cases for all asset classes
• Credit risk: Modelling, valuation and hedging
• Dynamic portfolio optimization with a defaultable security and regime-switching
• scientific article; zbMATH DE number 1577097 (Why is no real title available?)
• On pricing basket credit default swaps
• Optimal investment
• Optimal investment in credit derivatives portfolio under contagion risk
• Optimal investment under multiple defaults risk: a BSDE-decomposition approach
• Optimal investment with counterparty risk: a default-density model approach
• OPTIMAL PORTFOLIOS WITH DEFAULTABLE SECURITIES A FIRM VALUE APPROACH
• Portfolio optimization in a defaultable market under incomplete information
• Second-order backward stochastic differential equations and fully nonlinear parabolic PDEs
• User’s guide to viscosity solutions of second order partial differential equations
• Weak dynamic programming principle for viscosity solutions

Cited in

(4)

• Risk-sensitive asset management and cascading defaults
• Optimal investment under information driven contagious distress
• Credit portfolio selection with decaying contagion intensities
• Pricing European options under stochastic looping contagion risk model

This page was built for publication: Dynamic portfolio optimization with looping contagion risk

Report a bug (only for logged in users!)Click here to report a bug for this page (MaRDI item Q5742492)