We contribute a new insight into the pre-crisis massive levered exposures to default risk by formulating a parsimonious, closed-form analysis of conspicuous risk taking in default-prone assets. Under no arbitrage, default risk is compensated by an ‘yield pickup’ that can strongly attract aggressive investors via an investment horizon effect in their optimal non-myopic portfolios. We show that default risk decoupled from event risk does not discourage the formation of markedly geared portfolios. Our results add a new portfolio-based perspective to a mainstream model of default risk: even if arbitrage-free, the model may not find unconstrained support in general equilibrium.

Sbuelz, A., Battauz, A., Reaching Nirvana with a Defaultable Asset? , 2010, URL: http://ssrn.com/abstract=1798636 [http://hdl.handle.net/10807/24202]

Reaching Nirvana with a Defaultable Asset?

Sbuelz, Alessandro;
2010

Abstract

We contribute a new insight into the pre-crisis massive levered exposures to default risk by formulating a parsimonious, closed-form analysis of conspicuous risk taking in default-prone assets. Under no arbitrage, default risk is compensated by an ‘yield pickup’ that can strongly attract aggressive investors via an investment horizon effect in their optimal non-myopic portfolios. We show that default risk decoupled from event risk does not discourage the formation of markedly geared portfolios. Our results add a new portfolio-based perspective to a mainstream model of default risk: even if arbitrage-free, the model may not find unconstrained support in general equilibrium.
Inglese
http://ssrn.com/abstract=1798636
Sbuelz, A., Battauz, A., Reaching Nirvana with a Defaultable Asset? , 2010, URL: http://ssrn.com/abstract=1798636 [http://hdl.handle.net/10807/24202]
File in questo prodotto:
Non ci sono file associati a questo prodotto.

I documenti in IRIS sono protetti da copyright e tutti i diritti sono riservati, salvo diversa indicazione.

Utilizza questo identificativo per citare o creare un link a questo documento: https://hdl.handle.net/10807/24202
Citazioni
  • ???jsp.display-item.citation.pmc??? ND
  • Scopus ND
  • ???jsp.display-item.citation.isi??? ND
social impact