Int. J. of Industrial and Systems Engineering   »   2015 Vol.19, No.2



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


Author: Hao Chang


Address: School of Science, Tianjin Polytechnic University, Tianjin 300387, China; College of Management and Economics, Tianjin University, Tianjin 300072, China


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.


Keywords: Ho-Lee model; Vasicek model; liability dynamics; utility criteria; continuous time; dynamic portfolio selection; stochastic optimal control; stochastic interest rates; interest rate dynamics; stock prices; dynamic programming; investment strategies; closed-form solutions; market parameters.


DOI: 10.1504/IJISE.2015.067247


Int. J. of Industrial and Systems Engineering, 2015 Vol.19, No.2, pp.169 - 189


Available online: 02 Feb 2015



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