Optimal Portfolios With A Loan Dependent Credit Spread
- If an investor borrows money he generally has to pay higher interest rates than he would have received, if he had put his funds on a savings account. The classical model of continuous time portfolio optimisation ignores this effect. Since there is obviously a connection between the default probability and the total percentage of wealth, which the investor is in debt, we study portfolio optimisation with a control dependent interest rate. Assuming a logarithmic and a power utility function, respectively, we prove explicit formulae of the optimal control.
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| Author: | M. Krekel |
|---|---|
| URN: | urn:nbn:de:hbz:386-kluedo-12953 |
| Series (Serial Number): | Berichte des Fraunhofer-Instituts für Techno- und Wirtschaftsmathematik (ITWM Report) (32) |
| Document Type: | Report |
| Language of publication: | English |
| Year of Completion: | 2002 |
| Year of first Publication: | 2002 |
| Publishing Institution: | Fraunhofer-Institut für Techno- und Wirtschaftsmathematik |
| Date of the Publication (Server): | 2004/02/02 |
| Tag: | HJB equation; Portfolio optimisation; credit spread; log utility; non-linear wealth dynamics; power utility; stochastic control |
| Faculties / Organisational entities: | Fraunhofer (ITWM) |
| DDC-Cassification: | 5 Naturwissenschaften und Mathematik / 510 Mathematik |
| Licence (German): |  Standard gemäß KLUEDO-Leitlinien vor dem 27.05.2011 |