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- Title
OPTIMAL ASSETS ALLOCATION FOR RISK AVERSE INVESTOR UNDER MARKET RISKS AND CREDIT RISK.
- Authors
Rizal, Nora Amelda; Wiryono, Sudarso Kaderi; Prasetyo, Ahmad Danu
- Abstract
This research will study a reduced form model for optimal investment with a defaultable corporate bond under the market risks (deterministic rate of return and inflation risk), and credit risk. Those aforementioned risks are influenced by macro-economic, and considered as an exogenous risk. For inflation rate and credit spread rate will be modelled under the Vasicek model. By using Vasicek model, the mean reverting behaviour of the rates will be reached, since this model tends to have a constant mean in long term period. The data will be taken from the Indonesian rate of inflation (from January 2010 to December 2015). Further, this calculation will be solved using Stochastic Dynamic Programming. The closed form solution will give the proportion of wealth between bond and money account. Furthermore, the composition of the portfolio will be given as the result. The complicated equation of bond pricing will follow recovery market value (RMV) methods. Last the simulated data will be given to validate and calibrate the finding model.
- Subjects
CORPORATE bonds; RISK management in business; INFLATION risk; CREDIT risk; BOND prices; PRICE inflation
- Publication
International Journal of Business & Society, 2018, Vol 19, Issue 1, p245
- ISSN
1511-6670
- Publication type
Article