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optimal credit portfolio and consumption with regime switching and default contagion

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  • Fei Sun
  • Wenyuan Wang
  • Kaixin Yan

Abstract

We study optimal portfolio and consumption in a regime-switching multi-name credit market with default contagion. Defaults generate portfolio losses and alter the intensities of surviving securities. Under Cobb--Douglas utility, homogeneity reduces the HJB equation to a recursive ODE system indexed by the default states. Solving it backward from the all-default state, we establish existence and uniqueness of positive classical solutions, characterize the optimal feedback controls, and prove a verification theorem.

Suggested Citation

  • Fei Sun & Wenyuan Wang & Kaixin Yan, 2026. "optimal credit portfolio and consumption with regime switching and default contagion," Papers 2607.10542, arXiv.org.
    • Handle: RePEc:arx:papers:2607.10542
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