Dynamic asset allocation with default and systemic risks

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Abstract

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.

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Sbuelz, A. (2018). Dynamic asset allocation with default and systemic risks. In International Series in Operations Research and Management Science (Vol. 257, pp. 241–250). Springer New York LLC. https://doi.org/10.1007/978-3-319-61320-8_11

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