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Dynamic portfolio selection with liability and stochastic interest rates in the utility framework

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  • Hao Chang

Abstract

This paper is concerned with a continuous-time dynamic portfolio selection problem with liability process in the stochastic interest rate settings, where interest rate dynamics is supposed to be governed by the Ho-Lee model and the Vasicek model respectively, while liability dynamics is driven by Brownian motion with drift. Moreover, we assume that interest rate dynamics and liability dynamics are all generally correlated with stock prices. We use dynamic programming principle to investigate the optimal investment strategies in the power utility and exponential utility cases and obtain the closed-form solutions in explicit form. Finally, a numerical example is provided to illustrate how market parameters affect the optimal investment strategy respectively.

Suggested Citation

  • Hao Chang, 2015. "Dynamic portfolio selection with liability and stochastic interest rates in the utility framework," International Journal of Industrial and Systems Engineering, Inderscience Enterprises Ltd, vol. 19(2), pages 169-189.
    • Handle: RePEc:ids:ijisen:v:19:y:2015:i:2:p:169-189
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    Citations

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    Cited by:

    1. Ying Hu & Xiaomin Shi & Zuo Quan Xu, 2022. "Non-homogeneous stochastic LQ control with regime switching and random coefficients," Papers 2201.01433, arXiv.org, revised Jul 2023.
    2. Jian Pan & Qingxian Xiao, 2017. "Optimal mean–variance asset-liability management with stochastic interest rates and inflation risks," Mathematical Methods of Operations Research, Springer;Gesellschaft für Operations Research (GOR);Nederlands Genootschap voor Besliskunde (NGB), vol. 85(3), pages 491-519, June.
    3. Chen, Xingjiang & Ruan, Xinfeng & Zhang, Wenjun, 2021. "Dynamic portfolio choice and information trading with recursive utility," Economic Modelling, Elsevier, vol. 98(C), pages 154-167.
    4. El Hachloufi Mostafa & Ezouine Driss & El Haddad Mohammed, 2018. "Interaction between the VaR of cash flow and the interest rate using the ALM," Journal of Statistical and Econometric Methods, SCIENPRESS Ltd, vol. 7(1), pages 1-4.
    5. Yuanyuan Zhang & Xiang Li & Sini Guo, 2018. "Portfolio selection problems with Markowitz’s mean–variance framework: a review of literature," Fuzzy Optimization and Decision Making, Springer, vol. 17(2), pages 125-158, June.
    6. Yumo Zhang, 2021. "Dynamic Optimal Mean-Variance Portfolio Selection with a 3/2 Stochastic Volatility," Risks, MDPI, vol. 9(4), pages 1-21, March.

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