Optimal Portfolios With Stochastic Short Rate: Pitfalls When The Short Rate Is Non-Gaussian Or The Market Price Of Risk Is Unbounded
AbstractThe aim of this paper is to provide a survey of some of the problems occurring in portfolio problems with power utility, Non-Gaussian interest rates, and/or unbounded market price of risk. Using stochastic control theory, we solve several portfolio problems for different specifications of the short rate and the market price of risk. In particular, we consider a Gaussian model, the Cox-Ingersoll-Ross model, and squared Gaussian as well as lognormal specifications of the short rate. We find that even in a Gaussian framework the canonical candidate for the value function may not be finite if the market price of risk is unbounded. It is thus not straightforward to generalize results on continuous-time portfolio problems with power utility, Gaussian interest rates, and bounded market price of risk to situations where the short rate is Non-Gaussian or the market price of risk is unbounded.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Bibliographic InfoArticle provided by World Scientific Publishing Co. Pte. Ltd. in its journal International Journal of Theoretical and Applied Finance.
Volume (Year): 12 (2009)
Issue (Month): 06 ()
Contact details of provider:
Web page: http://www.worldscinet.com/ijtaf/ijtaf.shtml
You can help add them by filling out this form.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Tai Tone Lim).
If references are entirely missing, you can add them using this form.