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Dynamic Asset Allocation and Fixed Income Management

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  • Sørensen, Carsten

Abstract

This paper provides the solution to an intertemporal investment problem. The investor has power utility and can invest in stocks and bonds in a complete market setting where the Vasicek term structure model applies. The paper demonstrates that the zero-coupon bond with maturity at the investment horizon is the appropriate instrument for hedging changes in the opportunity set. Implementation issues are discussed and it is shown how the intertemporal investment problem can be recast as a series of mean-variance problems in terms of drift and volatility of the wealth forward price. An application based on a quasi-dynamic programming approach is considered.

Suggested Citation

  • Sørensen, Carsten, 1999. "Dynamic Asset Allocation and Fixed Income Management," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 34(04), pages 513-531, December.
  • Handle: RePEc:cup:jfinqa:v:34:y:1999:i:04:p:513-531_00
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