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Portfolio choices and VaR constraint with a defaultable asset

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  • Emilio Barucci
  • Andrea Cosso

Abstract

We consider a Constant Elasticity of Variance (CEV) model for the asset price of a defaultable asset showing the so-called leverage effect (high volatility when the asset price is low). We show that a VaR constraint re-evaluated over time induces an agent more risk averse than a logarithmic utility to take more risk than in the unconstrained setting.

Suggested Citation

  • Emilio Barucci & Andrea Cosso, 2015. "Portfolio choices and VaR constraint with a defaultable asset," Quantitative Finance, Taylor & Francis Journals, vol. 15(5), pages 853-864, May.
    • Handle: RePEc:taf:quantf:v:15:y:2015:i:5:p:853-864
    DOI: 10.1080/14697688.2013.871643
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    References listed on IDEAS

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    1. Jon Danielsson & Hyun Song Shin & Jean-Pierre Zigrand, 2011. "Balance Sheet Capacity and Endogenous Risk," FMG Discussion Papers dp665, Financial Markets Group.
    2. Tobias Adrian & Hyun Song Shin, 2008. "Financial intermediary leverage and value at risk," Staff Reports 338, Federal Reserve Bank of New York.
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    Cited by:

    1. Wang, Ning & Zhang, Nan & Jin, Zhuo & Qian, Linyi, 2019. "Robust non-zero-sum investment and reinsurance game with default risk," Insurance: Mathematics and Economics, Elsevier, vol. 84(C), pages 115-132.
    2. Li, Danping & Rong, Ximin & Zhao, Hui & Yi, Bo, 2017. "Equilibrium investment strategy for DC pension plan with default risk and return of premiums clauses under CEV model," Insurance: Mathematics and Economics, Elsevier, vol. 72(C), pages 6-20.
    3. Naqvi, Syed Muhammad Waqar Azeem & Rizvi, Syed Kumail Abbas & Orangzab & Ali, Muhammad, 2016. "Value at Risk at Asian Emerging Stock Markets," EconStor Open Access Articles and Book Chapters, ZBW - Leibniz Information Centre for Economics, vol. 28(3), pages 311-319.

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