Optimal Investment in Credit Derivatives Portfolio Under Contagion Risk

Bo, Lijun; Capponi, Agostino

doi:10.1111/mafi.12074

Cited by 45 publications

(20 citation statements)

References 31 publications

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“…Liang adds a fuzzy random theory to the combined credit derivatives based on the structural and reduced-form models in his doctoral thesis respectively [31]. Bo and Capponi model contagion risk among the reference entities in the portfolio by using a reduced-form model with interacting default intensities, and consider the optimal portfolio problem of a power investor who wishes to allocate his wealth between several credit default swaps (CDSs) and a money market account [32].…”

Section: Portfolio With Credit Derivativesmentioning

confidence: 99%

Optimal Portfolios Including Credit Bonds and Derivatives: A Latest Research Review

Ma¹,

Zhang²,

Li³

et al. 2019

Proceedings of the 2019 International Conference on Economic Management and Cultural Industry (ICEMCI 2019)

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Referring to the relevant literatures and theories, this paper summarizes and combs many scholars' viewpoints related to optimal portfolios with credit bonds and derivatives. Due to the fact that asset pricing is the basis of asset portfolio, this paper expounds the pricing and optimal portfolio problems containing these credit products under structural, reduced-form and hybrid models respectively. Although the studies of structural and reduced-form models have been matured, there still exist many defects. Hybrid model that combines the advantages of the two models mentioned above will become increasingly prevalent in the future.

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Section: Portfolio With Credit Derivativesmentioning

confidence: 99%

Optimal Portfolios Including Credit Bonds and Derivatives: A Latest Research Review

Ma¹,

Zhang²,

Li³

et al. 2019

Proceedings of the 2019 International Conference on Economic Management and Cultural Industry (ICEMCI 2019)

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“…Jiao, Kharroubi and Pham [21] study the model in which multiple jumps and default events are allowed. Recently, Bo and Capponi [9] examine the optimal portfolio problem of a power utility investor who allocates the wealth between credit default swaps and a money market for which the contagion risk is modeled via interacting default intensities.…”

Section: Introductionmentioning

confidence: 99%

Risk Sensitive Portfolio Optimization with Default Contagion and Regime-Switching

Liao

2019

SIAM J. Control Optim.

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We study an open problem of risk-sensitive portfolio allocation in a regime-switching credit market with default contagion. The state space of the Markovian regime-switching process is assumed to be a countably infinite set. To characterize the value function, we investigate the corresponding recursive infinite-dimensional nonlinear dynamical programming equations (DPEs) based on default states. We propose to work in the following procedure: Applying the theory of monotone dynamical system, we first establish the existence and uniqueness of classical solutions to the recursive DPEs by a truncation argument in the finite state space. The associated optimal feedback strategy is characterized by developing a rigorous verification theorem. Building upon results in the first stage, we construct a sequence of approximating risk sensitive control problems with finite states and prove that the resulting smooth value functions will converge to the classical solution of the original system of DPEs. The construction and approximation of the optimal feedback strategy for the original problem are also thoroughly discussed.AMS 2000 subject classifications: 3E20, 60J20. ∞ j=1 q ij = 0 for i ∈ Z + (i.e., j =i q ij = −q ii for i ∈ Z + ).

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“…Jiao and Pham (2013) discuss multiple defaults of a portfolio with exponential utility and prove a verification theorem for the value function characterized by a system of BSDEs. Bo and Capponi (2016) consider a market consisting of a risk-free bank account, a stock index, and a set of CDSs. The default of one name may trigger a jump in default intensities of other names in the portfolio, which in turn leads to jumps in the market valuation of CDSs referencing the surviving names and affects the optimal trading strategies.…”

Section: Introductionmentioning

confidence: 99%

Dynamic Portfolio Optimization with Looping Contagion Risk

Jia¹,

Pistorius²,

Zheng³

2019

SIAM J. Finan. Math.

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In this paper we consider a utility maximization problem with defaultable stocks and looping contagion risk. We assume that the default intensity of one company depends on the stock prices of itself and other companies, and the default of the company induces immediate drops in the stock prices of the surviving companies. We prove that the value function is the unique viscosity solution of the HJB equation. We also perform some numerical tests to compare and analyse the statistical distributions of the terminal wealth of log utility and power utility based on two strategies, one using the full information of intensity process and the other a proxy constant intensity process.

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Optimal Investment in Credit Derivatives Portfolio Under Contagion Risk

Cited by 45 publications

References 31 publications

Optimal Portfolios Including Credit Bonds and Derivatives: A Latest Research Review

Optimal Portfolios Including Credit Bonds and Derivatives: A Latest Research Review

Risk Sensitive Portfolio Optimization with Default Contagion and Regime-Switching

Dynamic Portfolio Optimization with Looping Contagion Risk

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