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Non†myopic portfolio choice with unpredictable returns: The jump†to†default case

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  • Anna Battauz
  • Alessandro Sbuelz

Abstract

If a risky asset is subject to a jump†to†default event, the investment horizon affects the optimal portfolio rule, even if the asset returns are unpredictable. The optimal rule solves a non†linear differential equation that, by not depending on the investor's pre†default value function, allows for its direct computation. Importantly for financial planners offering portfolio advice for the long term, tiny amounts of constant jump†to†default risk induce marked time variation in the optimal portfolios of long†run conservative investors. Our results are robust to the introduction of multiple non†defaultable risky assets.

Suggested Citation

  • Anna Battauz & Alessandro Sbuelz, 2018. "Non†myopic portfolio choice with unpredictable returns: The jump†to†default case," European Financial Management, European Financial Management Association, vol. 24(2), pages 192-208, March.
  • Handle: RePEc:bla:eufman:v:24:y:2018:i:2:p:192-208
    DOI: 10.1111/eufm.12142
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    3. Levy, Moshe, 2019. "Stocks for the log-run and constant relative risk aversion preferences," European Journal of Operational Research, Elsevier, vol. 277(3), pages 1163-1168.

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