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Portfolio optimization in a defaultable market under incomplete information

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Abstract

We consider the problem of maximization of expected utility from terminal wealth in a market model that is driven by a possibly not fully observable factor process and that takes explicitly into account the possibility of default for the individual assets as well as contagion (direct and information induced) among them. It is a multinomial model in discrete time that allows for an explicit solution. We discuss the solution within our defaultable and partial information setup, in particular we study its robustness. Numerical results are derived in the case of a log-utility function, and they can be analogously obtained for a power utility function.

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Authors and Affiliations

  1. Université d’Évry Val d’Essonne, 91025, Évry Cedex, France

    Giorgia Callegaro

  2. Laboratoire Analyse et Probabilités, Université d’Évry Val d’Essonne, Évry, France

    Monique Jeanblanc

  3. Università di Padova, Padova, Italy

    Wolfgang J. Runggaldier

Authors
  1. Giorgia Callegaro
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  2. Monique Jeanblanc
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  3. Wolfgang J. Runggaldier
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Corresponding author

Correspondence to Giorgia Callegaro.

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Callegaro, G., Jeanblanc, M. & Runggaldier, W.J. Portfolio optimization in a defaultable market under incomplete information. Decisions Econ Finan 35, 91–111 (2012). https://doi.org/10.1007/s10203-011-0116-0

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  • DOI: https://doi.org/10.1007/s10203-011-0116-0

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