4 Citazioni (Scopus)

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 2007–2008 crisis and in its aftermath. 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 it by stating the optimal dynamic portfolio problem of Kim and Omberg (Rev Financ Stud 9:141–161, 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):904–950, 1999; Ann Appl Probab 13(4):1504–1516, 2003).
Lingua originaleEnglish
pagine (da-a)1-22
Numero di pagine22
RivistaDecisions in Economics and Finance
DOI
Stato di pubblicazionePubblicato - 2017

Keywords

  • Convex duality
  • Duality-based optimal portfolio solutions
  • Dynamic asset allocation
  • Economics, Econometrics and Finance (all)2001 Economics, Econometrics and Finance (miscellaneous)
  • Finance
  • Investment horizon
  • Leverage
  • Non-myopic speculation
  • Predictable default risk
  • Reaching for yield
  • Sharpe ratio risk

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