Portfolio optimization in a default model under full/partial information

Thomas Lim () and Marie-Claire Quenez ()
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Thomas Lim: ENSIIE - Ecole Nationale Supérieure d'Informatique pour l'Industrie et l'Entreprise, LAP - Laboratoire Analyse et Probabilités - UEVE - Université d'Évry-Val-d'Essonne
Marie-Claire Quenez: LPMA - Laboratoire de Probabilités et Modèles Aléatoires - UPMC - Université Pierre et Marie Curie - Paris 6 - UPD7 - Université Paris Diderot - Paris 7 - CNRS - Centre National de la Recherche Scientifique

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Abstract: In this paper, we consider a financial market with assets exposed to some risks inducing jumps in the asset prices, and which can still be traded after default times. We use a default-intensity modeling approach, and address in this incomplete market context the problem of maximization of expected utility from terminal wealth for logarithmic, power and exponential utility functions. We study this problem as a stochastic control problem both under full and partial information. Our contribution consists in showing that the optimal strategy can be obtained by a direct approach for the logarithmic utility function, and the value function for the power utility function can be determined as the minimal solution of a backward stochastic differential equation. For the partial information case, we show how the problem can be divided into two problems: a filtering problem and an optimization problem. We also study the indifference pricing approach to evaluate the price of a contingent claim in an incomplete market and the information price for an agent with insider information.

Keywords: Optimal investment; default time; default intensity; filtering; dynamic programming principle; backward stochastic differential equation; indifference price; information pricing; logarithmic utility; power utility; exponential utility; exponential utility. (search for similar items in EconPapers)
Date: 2010-03-29
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