This paper solves the intertemporal investment problem of an investor holding a portfolio of default-free and defaultable bonds.

Time varying correlations are often estimated with Multivariate Garch models that are linear in squares and cross products of the data. A new class of multivariate models called dynamic conditional correlation (DCC) models is proposed.(...)

This paper finds out that the risk exposure of a trader subject to a VaR limit is always lower than that of an unconstrained trader and that the probability of extreme losses is also lower.