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Optimal Portfolios With Defaultable Securities A Firm Value Approach

Author

Listed:
  • RALF KORN

    (Department of Mathematics, University of Kaiserslautern, 67653 Kaiserslautern, Germany;
    Head of Department of Finance, Fraunhofer ITWM, Institute for Industrial and Financial Mathematics, Kaiserslautern, Germany)

  • HOLGER KRAFT

    (Fraunhofer ITWM, Institute for Industrial and Financial Mathematics, Department of Finance, Kaiserslautern, Germany)

Abstract

Credit risk is an important issue of current research in finance. While there is a lot of work on modeling credit risk, there is only a few works on continuous-time portfolio optimization with defaultable securities. In this paper we solve investment problems with defaultable bonds and stocks. We assume that credit risk is modeled by a firm value model.

Suggested Citation

  • Ralf Korn & Holger Kraft, 2003. "Optimal Portfolios With Defaultable Securities A Firm Value Approach," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 6(08), pages 793-819.
    • Handle: RePEc:wsi:ijtafx:v:06:y:2003:i:08:n:s0219024903002213
    DOI: 10.1142/S0219024903002213
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    Citations

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    Cited by:

    1. Lijun Bo & Xindan Li & Yongjin Wang & Xuewei Yang, 2013. "Optimal Investment and Consumption with Default Risk: HARA Utility," Asia-Pacific Financial Markets, Springer;Japanese Association of Financial Economics and Engineering, vol. 20(3), pages 261-281, September.
    2. Longjie Jia & Martijn Pistorius & Harry Zheng, 2017. "Dynamic Portfolio Optimization with Looping Contagion Risk," Papers 1710.05168, arXiv.org, revised Aug 2018.
    3. Deng, Chao & Zeng, Xudong & Zhu, Huiming, 2018. "Non-zero-sum stochastic differential reinsurance and investment games with default risk," European Journal of Operational Research, Elsevier, vol. 264(3), pages 1144-1158.
    4. Ralf Korn, 2008. "Optimal portfolios: new variations of an old theme," Computational Management Science, Springer, vol. 5(4), pages 289-304, October.
    5. Giovanni W. Puopolo, 2015. "Portfolio Selection with Transaction Costs and Default Risk," CSEF Working Papers 414, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
    6. Holger Kraft & Mogens Steffensen, 2006. "Portfolio problems stopping at first hitting time with application to default risk," Mathematical Methods of Operations Research, Springer;Gesellschaft für Operations Research (GOR);Nederlands Genootschap voor Besliskunde (NGB), vol. 63(1), pages 123-150, February.
    7. Dariusz Zawisza, 2017. "Stochastic control on the half-line and applications to the optimal dividend/consumption problem," Papers 1703.07339, arXiv.org, revised Jul 2018.
    8. Tomasz Bielecki & Inwon Jang, 2006. "Portfolio optimization with a defaultable security," Asia-Pacific Financial Markets, Springer;Japanese Association of Financial Economics and Engineering, vol. 13(2), pages 113-127, June.

    More about this item

    Keywords

    Optimal portfolios; credit risk; elasticity; duration; JEL classification code G11;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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