Portfolio Choice with Market-Credit Risk Dependencies

SIAM Journal on Control and Optimization, Forthcoming

38 Pages Posted: 27 Jun 2018

See all articles by Lijun Bo

Lijun Bo

University of Science and Technology of China (USTC)

Agostino Capponi

Columbia University - Department of Industrial Engineering and Operations Research

Date Written: June 18, 2018

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.

Keywords: investment/consumption problem, stochastic factors, martingale method

JEL Classification: G11, G31, C61, C11

Suggested Citation

Bo, Lijun and Capponi, Agostino, Portfolio Choice with Market-Credit Risk Dependencies (June 18, 2018). SIAM Journal on Control and Optimization, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3198376 or http://dx.doi.org/10.2139/ssrn.3198376

Lijun Bo

University of Science and Technology of China (USTC) ( email )

96, Jinzhai Road
Hefei, Anhui 230026
China

Agostino Capponi (Contact Author)

Columbia University - Department of Industrial Engineering and Operations Research ( email )

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

Paper statistics

Downloads
84
Abstract Views
1,179
Rank
557,986
PlumX Metrics