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A Risk-Sensitive Portfolio Optimisation Problem with Stochastic Interest Rate

Author

Listed:
  • Mayank Goel
  • Suresh Kumar K.

    (Mayank Goel and Suresh Kumar K. are at the Department of Mathematics, Indian Institute of Technology Bombay, Mumbai-400076, India. E-mails: mgoel@math.iitb.ac.in and suresh@math.iitb.ac.in)

Abstract
This article discusses a class of risk-sensitive portfolio optimisation problem in the finite horizon. Our market consists of stocks and a saving account with the underlying spot interest rate being governed by an stochastic differential equation (SDE). We prove the existence of optimal investment strategies and also obtain an explicit form for optimal strategies.

Suggested Citation

  • Mayank Goel & Suresh Kumar K., 2006. "A Risk-Sensitive Portfolio Optimisation Problem with Stochastic Interest Rate," Journal of Emerging Market Finance, Institute for Financial Management and Research, vol. 5(3), pages 263-282, December.
    • Handle: RePEc:sae:emffin:v:5:y:2006:i:3:p:263-282
    DOI: 10.1177/097265270600500304
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    References listed on IDEAS

    as
    1. Ho, Thomas S Y & Lee, Sang-bin, 1986. "Term Structure Movements and Pricing Interest Rate Contingent Claims," Journal of Finance, American Finance Association, vol. 41(5), pages 1011-1029, December.
    2. Merton, Robert C, 1969. "Lifetime Portfolio Selection under Uncertainty: The Continuous-Time Case," The Review of Economics and Statistics, MIT Press, vol. 51(3), pages 247-257, August.
    3. Merton, Robert C, 1973. "An Intertemporal Capital Asset Pricing Model," Econometrica, Econometric Society, vol. 41(5), pages 867-887, September.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    JEL Classification: C61; JEL Classification: C69; Portfolio optimisation; risk-sensitive control; stochastic interest rate;
    All these keywords.

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • C69 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Other

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