On Merton's Optimal Portfolio Problem Under Sporadic Bankruptcy

By Yaacov Kopeliovich, Michael Pokojovy

Rating

1303
Battle Count: 444

Relevance

9/10
The paper provides a novel approach to portfolio optimization that accounts for sporadic bankruptcy risk, which is highly relevant for quantitative trading strategies, especially for stocks with non-negligible default probabilities.

Implementation Complexity

7/10
While the mathematical derivations are complex, the resulting Merton ratio is relatively simple to implement. However, accurate estimation of model parameters, especially the default intensity, may be challenging.

Reproducibility

4/5
The paper provides detailed mathematical derivations and a numerical example, enhancing reproducibility.

About this paper

Methodology: Stochastic Control Theory. Problem types: Portfolio Optimization, Risk Management.

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