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Optimal Consumption and Portfolio Decision with Convertible Bond in Affine Interest Rate and Heston’s SV Framework

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  • Hao Chang
  • Xue-Yan Li

Abstract

We are concerned with an optimal investment-consumption problem with stochastic affine interest rate and stochastic volatility, in which interest rate dynamics are described by the affine interest rate model including the Cox-Ingersoll-Ross model and the Vasicek model as special cases, while stock price is driven by Heston’s stochastic volatility (SV) model. Assume that the financial market consists of a risk-free asset, a zero-coupon bond (or a convertible bond), and a risky asset. By using stochastic dynamic programming principle and the technique of separation of variables, we get the HJB equation of the corresponding value function and the explicit expressions of the optimal investment-consumption strategies under power utility and logarithmic utility. Finally, we analyze the impact of market parameters on the optimal investment-consumption strategies by giving a numerical example.

Suggested Citation

  • Hao Chang & Xue-Yan Li, 2016. "Optimal Consumption and Portfolio Decision with Convertible Bond in Affine Interest Rate and Heston’s SV Framework," Mathematical Problems in Engineering, Hindawi, vol. 2016, pages 1-12, June.
    • Handle: RePEc:hin:jnlmpe:4823451
    DOI: 10.1155/2016/4823451
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    Cited by:

    1. Yumo Zhang, 2023. "Utility maximization in a stochastic affine interest rate and CIR risk premium framework: a BSDE approach," Decisions in Economics and Finance, Springer;Associazione per la Matematica, vol. 46(1), pages 97-128, June.

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