Nonâ€ myopic portfolio choice with unpredictable returns: The jumpâ€ toâ€ default case
Anna Battauz and
European Financial Management, 2018, vol. 24, issue 2, 192-208
If a risky asset is subject to a jumpâ€ toâ€ default event, the investment horizon affects the optimal portfolio rule, even if the asset returns are unpredictable. The optimal rule solves a nonâ€ linear differential equation that, by not depending on the investor's preâ€ default value function, allows for its direct computation. Importantly for financial planners offering portfolio advice for the long term, tiny amounts of constant jumpâ€ toâ€ default risk induce marked time variation in the optimal portfolios of longâ€ run conservative investors. Our results are robust to the introduction of multiple nonâ€ defaultable risky assets.
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