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Optimal Investment and Consumption with Default Risk: HARA Utility

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  • Lijun Bo
  • Xindan Li
  • Yongjin Wang
  • Xuewei Yang

Abstract

In this paper, we consider a portfolio optimization problem in a defaultable market. The representative investor dynamically allocates his or her wealth among the following securities: a perpetual defaultable bond, a money market account and a default-free risky asset. The optimal investment and consumption policies that maximize the infinite horizon expected discounted HARA utility of the consumption are explicitly derived. Moreover, numerical illustrations are also presented. Copyright Springer Science+Business Media New York 2013

Suggested Citation

  • Lijun Bo & Xindan Li & Yongjin Wang & Xuewei Yang, 2013. "Optimal Investment and Consumption with Default Risk: HARA Utility," Asia-Pacific Financial Markets, Springer;Japanese Association of Financial Economics and Engineering, vol. 20(3), pages 261-281, September.
    • Handle: RePEc:kap:apfinm:v:20:y:2013:i:3:p:261-281
    DOI: 10.1007/s10690-013-9167-2
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    References listed on IDEAS

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    1. Tao Pang, 2006. "Stochastic Portfolio Optimization With Log Utility," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 9(06), pages 869-887.
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    4. Yuanfeng Hou & Xiangrong Jin, 2002. "Optimal Investment With Default Risk," FAME Research Paper Series rp46b, International Center for Financial Asset Management and Engineering.
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    Cited by:

    1. Nian Yao & Zhiming Yang, 2017. "Optimal excess-of-loss reinsurance and investment problem for an insurer with default risk under a stochastic volatility model," Papers 1704.08234, arXiv.org.

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