Dynamic Asset Allocation with Default and Systemic Risks
Dynamic Asset Allocation with Default and Systemic Risks
Systemic risk breeds default risk. I investigate the optimal portfolio implications of their joint presence for non-myopic investors in arbitrage-free markets when such risks take the form of asset value discontinuities. I contribute to the multiple-asset jump-diffusion portfolio analysis of Das and Uppal (J Financ 59:2809–2834, 2004) by introducing default risk and its investment-horizon effects on optimal portfolios (the optimal investment rules in Das and Uppal (J Financ 59:2809–2834, 2004) are time-invariant) and by linking excess expected returns to risk exposures.
Investment opportunity set, Arbitrage-free markets; Default risk; Investment opportunity set; Investment-horizon effects; Jump-diffusive processes; Risk premia; Strategic asset allocation; Systemic risk; Software; Computer Science Applications1707 Computer Vision and Pattern Recognition; Strategy and Management1409 Tourism, Leisure and Hospitality Management; Management Science and Operations Research; Applied Mathematics, Default risk, Risk premia, Arbitrage-free markets, Investment-horizon effects, Systemic risk, Strategic asset allocation, Jump-diffusive processes
Investment opportunity set, Arbitrage-free markets; Default risk; Investment opportunity set; Investment-horizon effects; Jump-diffusive processes; Risk premia; Strategic asset allocation; Systemic risk; Software; Computer Science Applications1707 Computer Vision and Pattern Recognition; Strategy and Management1409 Tourism, Leisure and Hospitality Management; Management Science and Operations Research; Applied Mathematics, Default risk, Risk premia, Arbitrage-free markets, Investment-horizon effects, Systemic risk, Strategic asset allocation, Jump-diffusive processes
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