Dynamic Portfolio Optimization with Looping Contagion Risk

We consider a utility maximization problem with defaultable stocks and looping contagion risk. We assume that the default intensity of one company depends on the stock prices of itself and another company, and the default of... [ view full abstract ]

We consider a utility maximization problem with defaultable stocks and looping contagion risk. We assume that the default intensity of one company depends on the stock prices of itself and another company, and the default of the company induces an immediate drop in the stock price of the surviving company. We prove the value function is the unique continuous viscosity solution of the HJB equation. We also compare and analyse the statistical distributions of terminal wealth of log utility based on two optimal strategies, one using the full information of intensity process, the other a proxy constant intensity process.