Consumption and investment with interest rate risk

JOURNAL OF MATHEMATICAL ANALYSIS AND APPLICATIONS

卷:476

Article

Guasoni, Paolo^1,2  Wang, Gu³ 

[1] Boston Univ, Dept Math & Stat, 111 Cummington Mall, Boston, MA 02215 USA

[2] Dublin City Univ, Sch Math Sci, Dublin 9, Ireland

[3] Worcester Polytech Inst, Dept Math Sci, 100 Inst Rd, Worcester, MA 01609 USA

关键词: Portfolio choice;    Consumption;    Stochastic interest rate;    Incomplete market;    Power utility;   

DOI  :  10.1016/j.jmaa.2019.01.003

来源: Elsevier

【 摘 要 】

This paper investigates the optimal investment and consumption problem in a continuous-time financial market for agents who maximize expected power utility from consumption, facing partially hedgeable interest rate risk. With no analytic solution available for the optimal strategy, we find closed-form approximate strategies by solving the same optimization problem in two fictitious complete markets. The approximate strategies help verify the existence and the optimality of the solution to the original optimization problem and provide bounds of the optimal consumption strategy and the approximation error, both in closed form. As the interest rate increases, if the investor's risk aversion is greater than one, the wealth effect dominates the substitution effect, and consumption increases. If the risk aversion is less than one, then the substitution effect dominates, and the investor consumes less. (C) 2019 Published by Elsevier Inc.

【 授权许可】

Free