We study the optimal dynamic portfolio exposure to predictable default risk, taking inspiration from the search for yield by means of defaultable assets observed before the 2007-2008 crisis and in its aftermath. Under no arbitrage, default risk is compensated by an yield pickup that can strongly attract aggressive investors via an investment-horizon effect in their optimal non-myopic portfolios. We show it by stating the optimal dynamic portfolio problem of Kim and Omberg (1996) for a defaultable risky asset and by rigorously proving the existence of nirvana-type solutions. We achieve such a contribution to the portfolio optimization literature by means of a careful, closed form-yielding adaptation to our defaultable-asset setting of the general convex duality approach of Kramkov and Schachermayer (1999, 2003).
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