Robust Optimal Investment Strategies with Exchange Rate Risk and Default Risk

Wei Wang, Qianyan Li, Quan Li and Song Xu ()
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Wei Wang: School of Mathematics and Statistics, Ningbo University, No. 818 Fenghua Road, Ningbo 315211, China
Qianyan Li: School of Mathematics and Statistics, Ningbo University, No. 818 Fenghua Road, Ningbo 315211, China
Quan Li: School of Mathematics and Statistics, Ningbo University, No. 818 Fenghua Road, Ningbo 315211, China
Song Xu: School of Mathematics and Statistics, Ningbo University, No. 818 Fenghua Road, Ningbo 315211, China

Mathematics, 2023, vol. 11, issue 6, 1-17

Abstract: The problem of robust optimal investment with exchange rate risk and default risk is studied. We assume that investors are ambiguity averse and they have access not only to the domestic market but also to the foreign market. The corresponding Hamilton–Jacobi–Bellman (HJB) equations are first obtained through the robust stochastic optimal control theory. Then, we discuss the optimal investment problems before and after default, and the value functions and optimal investment strategies are obtained. Finally, we find that the optimal investment strategies of pre-default are affected by the intensity of default and the credit spread, and the investors cannot hold defaultable bonds in the post-default case. Numerical results also show that the exchange rate risk, default risk and ambiguity aversion have a great effect on the optimal investment strategies.

Keywords: default risk; ambiguity aversion; HJB equation; optimal investment (search for similar items in EconPapers)
JEL-codes: C (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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