A Theory of Portfolio Choice and Partial Default

I develop a portfolio choice model that allows for partial default and accommodates trade in a rich set of assets. I characterize the solution to an infinite horizon, consumption/portfolio problem with Markov shocks and many assets. The characterization facilitates a simple solution algorithm and allows me to establish properties of the model. For example, agents default more in bad economic times. I define Recursive Default Equilibrium, which extends the equilibrium concept of Dubey, Geanakoplos, and Shubik (2005) to include an infinite number of time periods and many assets. I prove existence for a tremble-refined equilibrium that rules out off-equilibrium pessimism