TY - JOUR
T1 - Reaching nirvana with a defaultable asset?
AU - De Donno, Marzia
AU - Sbuelz, Alessandro
AU - Battauz, Anna
PY - 2017
Y1 - 2017
N2 - 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 2007â2008 crisis and in its aftermath. Under no arbitrage, default risk is compensated by an âyield 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 9:141â161, 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):904â950, 1999; Ann Appl Probab 13(4):1504â1516, 2003).
AB - 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 2007â2008 crisis and in its aftermath. Under no arbitrage, default risk is compensated by an âyield 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 9:141â161, 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):904â950, 1999; Ann Appl Probab 13(4):1504â1516, 2003).
KW - Convex duality
KW - Duality-based optimal portfolio solutions
KW - Dynamic asset allocation
KW - Economics, Econometrics and Finance (all)2001 Economics, Econometrics and Finance (miscellaneous)
KW - Finance
KW - Investment horizon
KW - Leverage
KW - Non-myopic speculation
KW - Predictable default risk
KW - Reaching for yield
KW - Sharpe ratio risk
KW - Convex duality
KW - Duality-based optimal portfolio solutions
KW - Dynamic asset allocation
KW - Economics, Econometrics and Finance (all)2001 Economics, Econometrics and Finance (miscellaneous)
KW - Finance
KW - Investment horizon
KW - Leverage
KW - Non-myopic speculation
KW - Predictable default risk
KW - Reaching for yield
KW - Sharpe ratio risk
UR - http://hdl.handle.net/10807/106952
UR - http://springerlink.metapress.com/app/home/journal.asp?wasp=e0ggqgqvlk6e7r03eua0&referrer=parent&backto=linkingpublicationresults,1:100169,1
U2 - 10.1007/s10203-017-0192-x
DO - 10.1007/s10203-017-0192-x
M3 - Article
SP - 1
EP - 22
JO - Rivista di Matematica per le Scienze Economiche e Sociali
JF - Rivista di Matematica per le Scienze Economiche e Sociali
SN - 1593-8883
ER -