OPTIMAL ASSET ALLOCATION WITH STOCHASTIC INTEREST RATES IN REGIME-SWITCHING MODELS
This paper focuses on optimal asset allocation with stochastic interest rates in regime-switching models. A class of stochastic optimal control problems with Markovian regime-switching is formulated for which a verification theorem is provided. The theory is applied to solve two portfolio optimizati...
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Veröffentlicht in: | International journal of theoretical and applied finance 2018-08, Vol.21 (5), p.1850032 |
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Hauptverfasser: | , , |
Format: | Artikel |
Sprache: | eng |
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Zusammenfassung: | This paper focuses on optimal asset allocation with stochastic interest rates in regime-switching models. A class of stochastic optimal control problems with Markovian regime-switching is formulated for which a verification theorem is provided. The theory is applied to solve two portfolio optimization problems (a portfolio of stock and savings account and a portfolio of mixed stock, bond and savings account) while a regime-switching Vasicek model is assumed for the interest rate. Closed-form solutions are obtained for a regime-switching power utility function. Numerical results are provided to illustrate the impact of regime-switching on the optimal investment decisions. |
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ISSN: | 0219-0249 1793-6322 |
DOI: | 10.1142/S0219024918500322 |