Portfolio Choice with Market-Credit Risk Dependencies
SIAM Journal on Control and Optimization, Forthcoming
38 Pages Posted: 27 Jun 2018
Date Written: June 18, 2018
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
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