Portfolio optimization in a defaultable market under incomplete information
- 309 Downloads
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.
KeywordsPortfolio optimization Partial information Credit risk Dynamic programming Robust solutions
JEL ClassificationG11 C61 C11
Unable to display preview. Download preview PDF.
- Bertsekas D.: Dynamic Programming and Stochastic Control. Academic Press, London (1976)Google Scholar
- Callegaro, G.: Credit risk models under partial information. Thesis Scuola Normale Superiore di Pisa and Université d’Évry Val d’Essonne (2010)Google Scholar
- Corsi M., Pham H., Runggaldier W.J.: Numerical approximation by quantization of control problems in finance under partial observations. In: Bensoussan, A., Zhang, Q. (eds) Mathematical Modelling and Numerical Methods in Finance, vol. XV, pp. 325–. Handbook of Numerical Analysis, North Holland (2008)Google Scholar
- Dana R.-A., Jeanblanc M.: Marchés Financiers en Temps Continu, Valorisation et Équilibre. 2nd edn. Economica, Recherche en gestion (1998)Google Scholar
- Schönbucher, P.J.: Information-Driven Default Contagion. Working Paper, Department of Mathematics, ETH Zürich (2003)Google Scholar