Abstract
We study the consumption and investment choice of a price-taking utility-maximizing investor having access to trade in stocks and interest-rate dependent assets with a stochastically evolving term structure of interest rates. We derive explicit expressions for the optimal investment strategy of a HARA utility investor in a market where the term structure of interest rates is given by a general, possibly non-Markovian multi-factor Gaussian Heath-Jarrow-Morton term structure model and market prices of risk are deterministic. The optimal investment strategy combines the growth-optimal strategy and a single bond hedging the multi-factor interest rate risk. With utility from terminal wealth only, the hedge bond is the zero-coupon bond maturing at the horizon of the investor. With utility from intermediate consumption, the hedge bond has a continuous coupon proportional to the expected future consumption rate under the forward martingale measure.
| Original language | English |
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| Place of Publication | Odense |
| Publisher | Syddansk Universitet |
| Number of pages | 20 |
| Publication status | Published - 1999 |