Portfolio Choice in Markets with Contagion

By Yacine Aït-Sahalia, Thomas R. Hurd. 2012

94 citations recorded by the source corpus.

We consider the problem of optimal investment and consumption in a class of multidimensional jump-diffusion models in which asset prices are subject to mutually exciting jump processes. This captures a type of contagion where each downward jump in an asset's price results in increased likelihood of further jumps, both in that asset and in the other assets. We solve in closed-form the dynamic consumption-investment problem of a log-utility investor in such a contagion model, prove a theorem verifying its optimality and discuss features of the solution, including flight-to-quality. The exponential and power utility investors are also considered: in these cases, the optimal strategy can be characterized as a distortion of the strategy of a corresponding non-contagion investor.

Subfields: Economics and Econometrics, Finance

View Paper: https://www.semanticscholar.org/paper/6f71b249cc35413942486c4c6faa3853de8f24ba

How researchers see this paper

The researchers whose trusted networks rank it highest, strongest advocate first. Every researcher gets a different order.

In Economics and Econometrics

1. Alan G. Hawkes
2. Angelos Dassios
3. Hongbiao Zhao

In Finance

1. Alan G. Hawkes
2. Angelos Dassios
3. Hongbiao Zhao
4. Mathias Drton

Citations in the corpus

• Hawkes processes and their applications to finance: a review (2018, methodology): “A similar model is used in Aït-Sahalia and Hurd (2016) applied to different asset classes and different markets.”
• Exact simulation of Hawkes process with exponentially decaying intensity (2013, background): “It is also straightforward to implement, and can easily extend to multi-dimensional versions, for further applications in modelling contagion risk or clustering arrival of events in finance, insurance, economics and many other fields.”