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Optimal Consumption and Investment Strategies with Stochastic Interest Rates 

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Author Info
Sørensen, Carsten (Department of Finance, Copenhagen Business School)
Munk, Claus (Dept. of Accounting, Finance & Law, SDU - Odense University)
Abstract

We study the consumption and investment choice of a time-additive power utility

investor and demonstrate how theinvestor should optimally hedge changes in the op-

portunity set. The investor is allowed to invest in stocks and interest rate dependent

assets in a continuous-time dynamically complete market. In particular, we demon-

strate that under stochastic interest rates the investor optimally hedges changes in the

term structure of interest rates by investing in acoupon bond, or portfolio of bonds,

with a payment schedule that matches the forward-expected (i.e certainty equivalent)

consumption pattern. This is of conceptual importance since the hedge portfolio does

not depend on the speci c term structure dynamics (only through the consequences

for the optimal consumption pattern). We consider two explicit examples where the

dynamics of the term structure of interest rates are given by theVasicek-model and a

three-factor non-Markovian Heath-Jarrow-Morton model.

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File URL: http://openarchive.cbs.dk/cbsweb/handle/10398/7175
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Publisher Info
Paper provided by Copenhagen Business School, Department of Finance in its series Working Papers with number 2000-9.

Download reference. The following formats are available: HTML (with abstract), plain text (with abstract), BibTeX, RIS (EndNote, RefMan, ProCite), ReDIF
Length: 42 pages
Date of creation: 01 May 2001
Date of revision:
Handle: RePEc:hhs:cbsfin:2000_009

Contact details of provider:
Postal: Department of Finance, Copenhagen Business School, Solbjerg Plads 3, A5, DK-2000 Frederiksberg, Denmark
Phone: +45 3815 3815
Email:
Web page: http://www.cbs.dk/departments/finance/
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Related research
Keywords: Investment; Strategies;

Find related papers by JEL classification:
A00 - General Economics and Teaching - - General - - - General

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