Optimal Consumption and Investment Strategies with Stochastic Interest Rates

Claus Munk, Carsten Sørensen*

*Corresponding author af dette arbejde

Publikation: Bidrag til tidsskriftTidsskriftartikelForskningpeer review

Abstrakt

We characterize the solution to the consumption and investment problem of a power utility investor in a continuous-time dynamically complete market with stochastic changes in the opportunity set. Under stochastic interest rates the investor optimally hedges against changes in the term structure of interest rates by investing in a coupon bond, or portfolio of bonds, with a payment schedule that equals the forward-expected (i.e. certainty equivalent) consumption pattern. Numerical experiments with two different specifications of the term structure dynamics (the Vasicek model and a three-factor non-Markovian Heath–Jarrow–Morton model) suggest that the hedge portfolio is more sensitive to the form of the term structure than to the dynamics of interest rates.
OriginalsprogEngelsk
TidsskriftJournal of Banking & Finance
Vol/bind28
Udgave nummer8
Sider (fra-til)1987-2013
Antal sider27
ISSN0378-4266
DOI
StatusUdgivet - 2004

Emneord

  • Renter
  • Rentetilskrivning
  • Investeringsplanlægning
  • Hedging
  • Dynamic asset allocation
  • Term structure of interest rates

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