Optimal Investment with Default Risk

@inproceedings{Hou2005OptimalIW,
  title={Optimal Investment with Default Risk},
  author={Yuanfeng Hou and Xiangrong Jin},
  year={2005}
}
In this paper, we investigate how investors who face both equity risk and credit risk would optimally allocate their financial wealth in a dynamic continuous-time setup. We model credit risk through the defaultable zero-coupon bond and solve the dynamics of its price after pricing it. Using stochastic control methods, we obtain a closed-form solution to this investment problem and characterize its variation with respect to different factors in the economy. We find that non-zero recovery rate of… CONTINUE READING

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