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Portfolio Selection with Random Liability and Affine Interest Rate in the Mean-Variance Framework

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Listed:
  • Chang Hao

    (College of Management and Economics, Tianjin University, Tianjin300072, China)

  • Wang Chunfeng

    (College of Management and Economics, Tianjin University, Tianjin300072, China)

  • Fang Zhenming

    (College of Management and Economics, Tianjin University, Tianjin300072, China)

Abstract

This paper studies a dynamic mean-variance portfolio selection problem with random liability in the affine interest rate environment, where the financial market consists of three assets: one risk-free asset, one risky asset and one zero-coupon bond. Assume that short rate is driven by affine interest rate model and liability process is described by the drifted Brownian motion, in addition, stock price dynamics is affected by interest rate dynamics. The investors expect to look for an optimal strategy to minimize the variance of the terminal surplus for a given expected terminal surplus. The efficient strategy and the efficient frontier are explicitly obtained by applying dynamic programming principle and Lagrange duality theorem. A numerical example is given to illustrate our results and some economic implications are analyzed.

Suggested Citation

  • Chang Hao & Wang Chunfeng & Fang Zhenming, 2017. "Portfolio Selection with Random Liability and Affine Interest Rate in the Mean-Variance Framework," Journal of Systems Science and Information, De Gruyter, vol. 5(3), pages 229-249, June.
    • Handle: RePEc:bpj:jossai:v:5:y:2017:i:3:p:229-249:n:3
    DOI: 10.21078/JSSI-2017-229-21
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    References listed on IDEAS

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