We study the optimal dynamic portfolio exposure to predictable default risk, taking inspiration from the search for yield by means of defaultable assets observed before the 2007â 2008 crisis and in its aftermath. Under no arbitrage, default risk is compensated by an â yield pickupâ that can strongly attract aggressive investors via an investment-horizon effect in their optimal non-myopic portfolios. We show it by stating the optimal dynamic portfolio problem of Kim and Omberg (Rev Financ Stud 9:141â 161, 1996) for a defaultable risky asset and by rigorously proving the existence of nirvana-type solutions. We achieve such a contribution to the portfolio optimization literature by means of a careful, closed-form-yielding adaptation to our defaultable asset setting of the general convex duality approach of Kramkov and Schachermayer (Ann Appl Probab 9(3):904â 950, 1999; Ann Appl Probab 13(4):1504â 1516, 2003).

Battauz, A., De Donno, M., Sbuelz, A., Reaching nirvana with a defaultable asset?, <<DECISIONS IN ECONOMICS AND FINANCE>>, 2017; (N/A): 1-22. [doi:10.1007/s10203-017-0192-x] [http://hdl.handle.net/10807/106952]

Reaching nirvana with a defaultable asset?

De Donno, Marzia
Secondo
;
Sbuelz, Alessandro
Ultimo
2017

Abstract

We study the optimal dynamic portfolio exposure to predictable default risk, taking inspiration from the search for yield by means of defaultable assets observed before the 2007â 2008 crisis and in its aftermath. Under no arbitrage, default risk is compensated by an â yield pickupâ that can strongly attract aggressive investors via an investment-horizon effect in their optimal non-myopic portfolios. We show it by stating the optimal dynamic portfolio problem of Kim and Omberg (Rev Financ Stud 9:141â 161, 1996) for a defaultable risky asset and by rigorously proving the existence of nirvana-type solutions. We achieve such a contribution to the portfolio optimization literature by means of a careful, closed-form-yielding adaptation to our defaultable asset setting of the general convex duality approach of Kramkov and Schachermayer (Ann Appl Probab 9(3):904â 950, 1999; Ann Appl Probab 13(4):1504â 1516, 2003).
2017
Inglese
Battauz, A., De Donno, M., Sbuelz, A., Reaching nirvana with a defaultable asset?, <<DECISIONS IN ECONOMICS AND FINANCE>>, 2017; (N/A): 1-22. [doi:10.1007/s10203-017-0192-x] [http://hdl.handle.net/10807/106952]
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Utilizza questo identificativo per citare o creare un link a questo documento: https://hdl.handle.net/10807/106952
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