Portfolio Optimization Under Credit Risk
Copyright policy )Portfolio Optimization Under Credit Risk
A financial market model is considered which describes the dynamics of the non-defaultable short rate (\(r\)), the defaultable short rate (\(s\)) and the uncertainty index (\(u\)). Stochastic differential equations by a standard Brownian motion are used to describe \((r(t),s(t),u(t))\). The prices of non-defaultable and defaultable discount bonds are evaluated. The problem of portfolio optimization in this model is reduced to a linear mixed-integer programming problem. An application to the portfolio of German, Italy and Greece sovereign bonds is discussed.
- Technical University of Munich Germany
- KPMG United Kingdom
- Ludwig-Maximilians-Universität München Germany
Portfolio theory, Mixed integer programming, Risk theory, insurance, uncertainty index, linear mixed-integer programming, Statistical methods; economic indices and measures, defaultable bond price
Portfolio theory, Mixed integer programming, Risk theory, insurance, uncertainty index, linear mixed-integer programming, Statistical methods; economic indices and measures, defaultable bond price
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