Abstract

http://ssrn.com/abstract=1407923
 
 

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Default Correlation and Optimal Portfolio with Corporate Bonds


Sheen Liu


Washington State University - Vancouver

May, 21 2009


Abstract:     
This study addresses the optimal investment problem with corporate bonds. The investment strategy with corporate bonds is derived to maximize the expected logarithmic utility and the constant relative risk aversion utility of terminal wealth. Default intensity is a function of multiple state variables, which follow CIR process. Three types of default correlation are considered: the conditional independent default correlation, the simultaneous default correlation, and the contagion default correlation. Solutions are derived by using the duality approach. A few implications of the optimal strategy are discussed. Unlike the default-free assets, the optimization of the portfolio with defaultable bonds does not bring out the fund separation.

Number of Pages in PDF File: 49

Keywords: Defaultable bonds, Optimal portfolio, Default correlation

JEL Classification: G11, G12

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Date posted: May 21, 2009  

Suggested Citation

Liu, Sheen, Default Correlation and Optimal Portfolio with Corporate Bonds (May, 21 2009). Available at SSRN: http://ssrn.com/abstract=1407923 or http://dx.doi.org/10.2139/ssrn.1407923

Contact Information

Sheen Liu (Contact Author)
Washington State University - Vancouver ( email )
14204 NE Salmon Creek Ave.
Vancouver, WA 98686
United States
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