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Robust Optimal Investment Strategies with Exchange Rate Risk and Default Risk

Author

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  • Wei Wang

    (School of Mathematics and Statistics, Ningbo University, No. 818 Fenghua Road, Ningbo 315211, China)

  • Qianyan Li

    (School of Mathematics and Statistics, Ningbo University, No. 818 Fenghua Road, Ningbo 315211, China)

  • Quan Li

    (School of Mathematics and Statistics, Ningbo University, No. 818 Fenghua Road, Ningbo 315211, China)

  • Song Xu

    (School of Mathematics and Statistics, Ningbo University, No. 818 Fenghua Road, Ningbo 315211, China)

Abstract

The problem of robust optimal investment with exchange rate risk and default risk is studied. We assume that investors are ambiguity averse and they have access not only to the domestic market but also to the foreign market. The corresponding Hamilton–Jacobi–Bellman (HJB) equations are first obtained through the robust stochastic optimal control theory. Then, we discuss the optimal investment problems before and after default, and the value functions and optimal investment strategies are obtained. Finally, we find that the optimal investment strategies of pre-default are affected by the intensity of default and the credit spread, and the investors cannot hold defaultable bonds in the post-default case. Numerical results also show that the exchange rate risk, default risk and ambiguity aversion have a great effect on the optimal investment strategies.

Suggested Citation

  • Wei Wang & Qianyan Li & Quan Li & Song Xu, 2023. "Robust Optimal Investment Strategies with Exchange Rate Risk and Default Risk," Mathematics, MDPI, vol. 11(6), pages 1-17, March.
    • Handle: RePEc:gam:jmathe:v:11:y:2023:i:6:p:1550-:d:1104326
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    References listed on IDEAS

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