Optimal Portfolio Policies for an Investor with Uncertain Time of Death in a Stochastic Interest Rate Economy PDF Download
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Author: Mads Kvist Pedersen
Publisher:
ISBN:
Category :
Languages : en
Pages :
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Author: Mads Kvist Pedersen
Publisher:
ISBN:
Category :
Languages : en
Pages :
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Author: Holger Kraft
Publisher:
ISBN: 9783642170423
Category :
Languages : en
Pages : 184
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Book Description
The continuous-time portfolio problem consists of finding the optimal investment strategy of an investor. In the classical Merton problem the investor can allocate his funds to a riskless savings account and risky assets. However, to get explicit results, it is assumed that the interest rates are deterministic and that the assets are default free. In this monograph both assumptions are weakened: The author analyzes and solves portfolio problems with stochastic interest rates and with defaultable assets. Besides, he briefly discusses how portfolio problems with foreign assets can be handled. The focus of the monograph is twofold: On the one hand, the economical problems are carefully explained, on the other hand their formal solution is rigorously presented. For this reason the text should be of interest to researchers with a Finance background as well as to researchers with a more formal background who would like to see how mathematics is applied to portfolio theory.
Author: Ralf Korn
Publisher: World Scientific
ISBN: 9812385347
Category : Business & Economics
Languages : en
Pages : 352
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Book Description
The focus of the book is the construction of optimal investment strategies in a security market model where the prices follow diffusion processes. It begins by presenting the complete Black-Scholes type model and then moves on to incomplete models and models including constraints and transaction costs. The models and methods presented will include the stochastic control method of Merton, the martingale method of Cox-Huang and Karatzas et al., the log optimal method of Cover and Jamshidian, the value-preserving model of Hellwig etc.
Author: Abraham Lioui
Publisher:
ISBN:
Category :
Languages : en
Pages :
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In an economy where interest rates and stock price changes follow fairly general stochastic processes, we analyse the portfolio problem of an expected utility investor. When the investment opportunity set is driven by an arbitrary number of state variables, the optimal portfolio strategy is known to contain a speculative element and Merton-Breeden hedging terms against the fluctuations of each and every state variable. While the first component is well identified and easy to work out, the implementation of the last ones is problematic as the investor must identify all the relevant state variables and estimate their distribution characteristics. Using a new decomposition of the optimal wealth, we show that the optimal strategy can be simplified to include, in addition to the speculative component, only two Merton-Breeden type hedging elements, however large is the number of state variables. The first one is associated with interest rate risk and the second one with the risk brought about by the co-movements of the spot interest rate and the market prices of risk. The implementation of the optimal strategy is thus much easier, as it involves estimating the characteristics of the yield curve and the market prices of risk only rather than those of numerous (a priori unknown) state variables. Moreover, the investor's horizon is shown explicitly to play a crucial role in the optimal strategy design, in sharp contrast with the traditional decomposition.
Author: Ashri Rahadi
Publisher:
ISBN:
Category :
Languages : en
Pages : 6
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Book Description
Tempting to formulate the long-term investment strategy for investors who dynamically adjust her portfolio over her lifetime, we are interested to optimize the end-of-period terminal wealth using Bellman Principles. We designed the portfolio to be replete with risky asset and risk-less asset/fixed-income asset in the continuous framework. The stochastic volatility model is depicted in risky asset dynamic known as Constant Elasticity of Variance (CEV), because the empirical bias of Leverage effect in stock price evolution founded by Black Scholes can be directly examined. Meanwhile the bond pricing analysis was no longer classified as risk-free asset because it was analyzed under the stochastic Inflation and Interest rate of affine structures named Vasicek. Because we want to reflect their mean-reverting behavior as they're hovering around their long-term mean. Later, state space was constructed and portion of risky asset was elected to be control variables for supremum over value function. The concept of investment decision is intertemporal, as today decision affected tomorrow's, which finding its optimal rate would be trade-off for investor. For this, we framed the decision criteria with investor's utility function from class Decreasing Absolute Risk Aversion (DARA), the class that generally most investor mostly consistent with [Friend & Blumme 1975]. The problem description above can be represented as stochastic optimal control problem and it was solved with dynamic programming argument with modified verification theorem to tackle the issue of Stochastic Differential Equation well-posedness violation. Through stages of change variables, we were able to find the closed form trading solution from corresponding Hamilton Jacobi Bellman (HJB) equation. Compare to standard Merton model, our trading strategies strength are determining interest rate, inflation rate and degree of leverage for improvement and hence have inline economic logic reasoning for our solutions.
Author: Claus Munk
Publisher:
ISBN:
Category :
Languages : en
Pages : 63
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Book Description
We investigate the optimal investment and consumption choice of individual investors with uncertain future labor income operating in a financial market with stochastic interest rates. Since the present value of the individual's future income is a main determinant of the optimal behavior and this present value depends heavily on the interest rate dynamics, the joint stochastics of income and interest rates will have consequences beyond the separate effects of stochastic income and stochastic interest rates. We study both the case where income risk is spanned and there are no portfolio constraints and the case with non-spanned income risk and a constraint ruling out borrowing against future income. For the spanned, unconstrained problem we study a special case in which we obtain closed-form expressions for the optimal policies. For the unspanned, constrained problem we implement a numerical solution technique and compare the solutions to the spanned, unconstrained problem. We also allow for typical life-cycle variations in labor income.
Author: Sid Browne
Publisher:
ISBN:
Category : Portfolio management
Languages : en
Pages : 36
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Author: Jakub W. Jurek
Publisher:
ISBN:
Category : Hedging (Finance)
Languages : en
Pages : 92
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Book Description
We develop an analytical solution to the dynamic portfolio choice problem of an investor with utility defined over wealth at a terminal horizon who faces an investment opportunity set with time-varying risk premia, real interest rates and inflation. The variation in investment opportunities is captured by a flexible vector autoregressive parameterization, which readily accommodates a large number of assets and state variables. We find that the optimal dynamic portfolio strategy is an affine function of the vector of state variables describing investment opportunities, with coefficients that are a function of the investment horizon. We apply our method to the optimal portfolio choice problem of an investor who can choose between value and growth stock portfolios, and among these equity portfolios plus bills and bonds.
Author: Michael Ernst
Publisher: Independently Published
ISBN: 9781728845234
Category :
Languages : en
Pages : 188
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Book Description
Since the 2008 global financial crisis, the world's central banks have kept interest rates artificially low while simultaneously elevating global equity prices, real estate valuations, and debt. Faced with rising inflationary pressure, the Federal Reserve has recently hiked interest rates and embarked on a quantitative tightening policy. This suggests a change in the economic cycle, and investors must be able to adapt to the evolving market conditions.The shifting central bank policy, coupled with current geopolitical uncertainty, can add to the unpredictability of markets, causing some investors to take an emotional rather than a rational response to managing their portfolios. Oftentimes fear, greed, and risk cause us to make decisions that are not necessarily in our best interest.While diversification is an important investment concept, being diversified between stocks, bonds, and cash alone may not be enough. A static "buy and hold" approach in a market that is increasingly dynamic is antiquated. Today, prudent risk management and capital preservation strategies are paramount to protecting investor's long-term interests. Diversifying by investment style and across sectors, geographies, and asset classes can help insulate portfolios from market uncertainty and improve the potential for better outcomes. In The Adaptive Investment Portfolio, Michael P. Ernst offers a clear and well defined process that guides investors on how to build a portfolio that automatically adapts to changing market conditions. By reducing volatility and providing a smoother ride, investors can avoid taking an emotional response to managing their investments, providing a higher level of confidence regardless of market conditions.
Author: Yihong Xia
Publisher:
ISBN:
Category :
Languages : en
Pages : 14
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Book Description
The optimal bond-stock mix is examined in light of an apparent inconsistency between the Tobin Separation Theorem and the advice of popular investment advisors which has been pointed out by Canner et al. (1997). It is shown that the apparent inconsistency is largely explicable in terms of the hedging demands of optimising long-term investors in an environment in which the investment opportunity set is subject to stochastic shocks. The analysis points to the importance of considering investors' time horizons in analyzing optimal portfolio policies.
