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On Portfolio Separation in the Merton Problem with Bankruptcy or Default

In: Proceedings of the International Conference on Stochastic Analysis and Applications

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  • Nils Chr. Framstad

Abstract

When portfolio choice in discontinuous asset price models is considered, the possibility of a jump to 0 is often overlooked. We solve the Merton problem for a (modified) HARA agent in a generalized geometric Lévy market where the market coefficients can change simultaneously with the jumps in the prices. We show that two fund separation does only to some extent carry over, as agents with same exponent and different intertemporal trade-offs may no longer have the same mutual fund in the presence of such possible changes.

Suggested Citation

  • Nils Chr. Framstad, 2004. "On Portfolio Separation in the Merton Problem with Bankruptcy or Default," Springer Books, in: Sergio Albeverio & Anne Boutet de Monvel & Habib Ouerdiane (ed.), Proceedings of the International Conference on Stochastic Analysis and Applications, pages 249-265, Springer.
    • Handle: RePEc:spr:sprchp:978-1-4020-2468-9_16
    DOI: 10.1007/978-1-4020-2468-9_16
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    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets

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