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Non‐myopic portfolio choice with unpredictable returns: The jump‐to‐default case
Author(s) -
Battauz Anna,
Sbuelz Alessandro
Publication year - 2018
Publication title -
european financial management
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.311
H-Index - 64
eISSN - 1468-036X
pISSN - 1354-7798
DOI - 10.1111/eufm.12142
Subject(s) - portfolio , jump , economics , asset (computer security) , econometrics , actuarial science , financial economics , computer science , physics , computer security , quantum mechanics
If a risky asset is subject to a jump‐to‐default event, the investment horizon affects the optimal portfolio rule, even if the asset returns are unpredictable. The optimal rule solves a non‐linear differential equation that, by not depending on the investor's pre‐default value function, allows for its direct computation. Importantly for financial planners offering portfolio advice for the long term, tiny amounts of constant jump‐to‐default risk induce marked time variation in the optimal portfolios of long‐run conservative investors. Our results are robust to the introduction of multiple non‐defaultable risky assets.