Rethinking Valuation and Pricing Models

31

Optimal Portfolio Choice, Derivatives and Event Risk

Matthias Muck and Stefan Weisheit

University of Bamberg

Chapter Outline

31.1 Introduction

31.2 Model

31.2.1 Investment problem with derivatives

31.2.2 Investment problem without derivatives

31.3 Parameter Estimation

31.4 Optimal Portfolios

31.4.1 Optimal exposures

31.4.2 Portfolio improvement

31.4.3 Demand for derivatives and stock

31.5 Conclusion

References

31.1 Introduction

In September 2008, the US administration decided not to rescue Lehman Brothers—one of the country’s biggest investment banks. According to the views of many practitioners and academics this event fostered the financial crises that was triggered by the US subprime mortgage crises. In the aftermath, markets experienced ...