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Portfolio optimization in a defaultable market under incomplete information

Author

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  • Giorgia Callegaro
  • Monique Jeanblanc
  • Wolfgang Runggaldier

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. Copyright Springer-Verlag 2012

Suggested Citation

  • Giorgia Callegaro & Monique Jeanblanc & Wolfgang Runggaldier, 2012. "Portfolio optimization in a defaultable market under incomplete information," Decisions in Economics and Finance, Springer;Associazione per la Matematica, vol. 35(2), pages 91-111, November.
    • Handle: RePEc:spr:decfin:v:35:y:2012:i:2:p:91-111
    DOI: 10.1007/s10203-011-0116-0
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    Citations

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    Cited by:

    1. Lijun Bo & Agostino Capponi, 2018. "Portfolio Choice with Market-Credit Risk Dependencies," Papers 1806.07175, arXiv.org.
    2. Francesca Biagini & Andrea Mazzon & Ari-Pekka Perkkiö, 2023. "Optional projection under equivalent local martingale measures," Finance and Stochastics, Springer, vol. 27(2), pages 435-465, April.
    3. Guohui Guan, 2020. "Equilibrium and Precommitment Mean-Variance Portfolio Selection Problem with Partially Observed Price Index and Multiple Assets," Methodology and Computing in Applied Probability, Springer, vol. 22(1), pages 25-47, March.
    4. Lijun Bo & Huafu Liao & Xiang Yu, 2017. "Risk Sensitive Portfolio Optimization with Default Contagion and Regime-Switching," Papers 1712.05676, arXiv.org, revised Oct 2018.

    More about this item

    Keywords

    Portfolio optimization; Partial information; Credit risk; Dynamic programming; Robust solutions; G11; C61; C11;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General

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