Optimal Credit Investment with Borrowing Costs
报告人： Lijun Bo, University of Science and Technology of China
时间：2016-06-08 14:00 ~ 15:00
地点：Room 115, Guanghua Building 1
We consider the portfolio decision problem of a risky investor. The investor borrows at a rate higher than his lending rate, and invests in a risky bond whose market price is correlated with the credit quality of the investor. By viewing the concave drift of the wealth process as a continuous function of the admissible control, we characterize the optimal strategy in terms of a relation between a critical borrowing threshold and solutions of a system of first order conditions. We analyze the nonlinear dynamic programming equation and prove singular growth of its coe;cients. Using a truncation technique relying on the locally Lipschitz-continuity of the optimal strategy, we remove the singularity and show existence and uniqueness of a global regular solution. Our explicit characterization of the strategy has direct financial implications: it indicates that the investor switches from overinvesting in the bond when his borrowing costs are low and the bond su;fficiently safe to underinvesting or short-selling it when his financing costs are high or the bond very risky.
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