Portfolio Optimization in a Defaultable Lévy Driven Market Model

40 Pages Posted: 29 May 2014

See all articles by Stefano Pagliarani

Stefano Pagliarani

DEAMS, Università di Trieste

Tiziano Vargiolu

Department of Mathematics

Date Written: March 25, 2014


In this paper we analyse a market where the risky assets follow defaultable exponential additive processes, with coefficients depending on the default state of the assets. In this market we show that, when an investor wants to maximize a utility function which is logarithmic on both his/her consumption and terminal wealth, his/her optimal portfolio strategy consists in keeping proportions of wealth in the risky assets which only depend on time and on the default state of the risky assets, but not on their price nor on current wealth level; this generalizes analogous results of [34] in non-defaultable markets without intermediate consumption. We then present several examples of market where one, two or several assets can default, with the possibility of both direct and information-induced contagion, obtaining explicit optimal investment strategies in several cases. Finally, we study the growth-optimal portfolio in our framework and show an example with necessary and sufficient conditions for it to be a proper martingale or a strict local martingale.

Keywords: default, additive processes, logarithmic utility, consumption, terminal wealth, contagion, portfolio optimization, growth-optimal portfolio, HJB, linear programming, verification theorem

Suggested Citation

Pagliarani, Stefano and Vargiolu, Tiziano, Portfolio Optimization in a Defaultable Lévy Driven Market Model (March 25, 2014). Available at SSRN: https://ssrn.com/abstract=2442775 or http://dx.doi.org/10.2139/ssrn.2442775

Stefano Pagliarani (Contact Author)

DEAMS, Università di Trieste ( email )

Via Valerio n. 4/1

HOME PAGE: http://www.cmap.polytechnique.fr/~pagliarani/

Tiziano Vargiolu

Department of Mathematics ( email )

+390498271383 (Phone)

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Abstract Views
PlumX Metrics