An optimal portfolio model with stochastic volatility and stochastic interest rate

Eun Jung Noh; Jeong Hoon Kim

doi:10.1016/j.jmaa.2010.09.055

An optimal portfolio model with stochastic volatility and stochastic interest rate

Eun Jung Noh, Jeong Hoon Kim

Department of Mathematics

Research output: Contribution to journal › Article › peer-review

35 Citations (Scopus)

Abstract

We consider a portfolio optimization problem under stochastic volatility as well as stochastic interest rate on an infinite time horizon. It is assumed that risky asset prices follow geometric Brownian motion and both volatility and interest rate vary according to ergodic Markov diffusion processes and are correlated with risky asset price. We use an asymptotic method to obtain an optimal consumption and investment policy and find some characteristics of the policy depending upon the correlation between the underlying risky asset price and the stochastic interest rate.

Original language	English
Pages (from-to)	510-522
Number of pages	13
Journal	Journal of Mathematical Analysis and Applications
Volume	375
Issue number	2
DOIs	https://doi.org/10.1016/j.jmaa.2010.09.055
Publication status	Published - 2011 Mar 15

Bibliographical note

Funding Information:
The work of the first author was supported by the Brain Korea 21 Project at Yonsei University, 2010. The work of the second author was supported by Basic Science Research Program through the National Research Foundation of Korea funded by the Ministry of Education, Science and Technology (NRF-2010-0008717) and in part by the MKE and KIAT through the Workforce Development Program in Strategic Technology.

All Science Journal Classification (ASJC) codes

Analysis
Applied Mathematics

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10.1016/j.jmaa.2010.09.055

Cite this

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abstract = "We consider a portfolio optimization problem under stochastic volatility as well as stochastic interest rate on an infinite time horizon. It is assumed that risky asset prices follow geometric Brownian motion and both volatility and interest rate vary according to ergodic Markov diffusion processes and are correlated with risky asset price. We use an asymptotic method to obtain an optimal consumption and investment policy and find some characteristics of the policy depending upon the correlation between the underlying risky asset price and the stochastic interest rate.",

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N2 - We consider a portfolio optimization problem under stochastic volatility as well as stochastic interest rate on an infinite time horizon. It is assumed that risky asset prices follow geometric Brownian motion and both volatility and interest rate vary according to ergodic Markov diffusion processes and are correlated with risky asset price. We use an asymptotic method to obtain an optimal consumption and investment policy and find some characteristics of the policy depending upon the correlation between the underlying risky asset price and the stochastic interest rate.

AB - We consider a portfolio optimization problem under stochastic volatility as well as stochastic interest rate on an infinite time horizon. It is assumed that risky asset prices follow geometric Brownian motion and both volatility and interest rate vary according to ergodic Markov diffusion processes and are correlated with risky asset price. We use an asymptotic method to obtain an optimal consumption and investment policy and find some characteristics of the policy depending upon the correlation between the underlying risky asset price and the stochastic interest rate.

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An optimal portfolio model with stochastic volatility and stochastic interest rate

Abstract

Bibliographical note

All Science Journal Classification (ASJC) codes

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