Portfolio problems stopping at first hitting time with application to default risk

@article{Kraft2006PortfolioPS,
  title={Portfolio problems stopping at first hitting time with application to default risk},
  author={Holger Kraft and Mogens Steffensen},
  journal={Math. Meth. of OR},
  year={2006},
  volume={63},
  pages={123-150}
}
In this paper a portfolio problem is considered where trading in the risky asset is stopped if a state process hits a predefined barrier. This state process need not to be perfectly correlated with the risky asset. We give a representation result for the value function and provide a verification theorem. As an application, we explicitly solve the problem by assuming that the state process is an arithmetic Brownian motion. Then the result is used as a starting point to solve and analyze a… CONTINUE READING

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