Skip to Main content Skip to Navigation
Preprints, Working Papers, ...

Optimal investment with counterparty risk: a default-density modeling approach

Abstract : We consider a financial market with a stock exposed to a counterparty risk indu\-cing a drop in the price, and which can still be traded after this default time. We use a default-density modeling approach, and address in this incomplete market context the expected utility maximization from terminal wealth. We show how this problem can be suitably decomposed in two optimization problems in complete market framework: an after-default utility maximization and a global before-default optimization problem involving the former one. These two optimization problems are solved explicitly, respectively by duality and dynamic programming approaches, and provide a fine understanding of the optimal strategy. We give some numerical results illustrating the impact of counterparty risk and the loss given default on optimal trading strategies, in particular with respect to the Merton portfolio selection problem.
Document type :
Preprints, Working Papers, ...
Complete list of metadata

https://hal.archives-ouvertes.fr/hal-00365499
Contributor : Ying Jiao <>
Submitted on : Tuesday, March 3, 2009 - 3:52:46 PM
Last modification on : Thursday, December 10, 2020 - 10:56:47 AM
Long-term archiving on: : Tuesday, June 8, 2010 - 7:59:46 PM

Files

jiao-pham1.pdf
Files produced by the author(s)

Identifiers

  • HAL Id : hal-00365499, version 1
  • ARXIV : 0903.0909

Citation

Ying Jiao, Huyen Pham. Optimal investment with counterparty risk: a default-density modeling approach. 2009. ⟨hal-00365499⟩

Share

Metrics

Record views

478

Files downloads

123