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Decisions in Economics and Finance

, Volume 35, Issue 2, pp 91–111 | Cite as

Portfolio optimization in a defaultable market under incomplete information

  • Giorgia CallegaroEmail author
  • Monique Jeanblanc
  • Wolfgang J. Runggaldier
Article

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.

Keywords

Portfolio optimization Partial information Credit risk Dynamic programming Robust solutions 

JEL Classification

G11 C61 C11 

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Copyright information

© Springer-Verlag 2011

Authors and Affiliations

  • Giorgia Callegaro
    • 1
    Email author
  • Monique Jeanblanc
    • 2
  • Wolfgang J. Runggaldier
    • 3
  1. 1.Université d’Évry Val d’EssonneÉvry CedexFrance
  2. 2.Laboratoire Analyse et ProbabilitésUniversité d’Évry Val d’EssonneÉvryFrance
  3. 3.Università di PadovaPadovaItaly

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