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Worst-Case Portfolio Optimization under Stochastic Interest Rate Risk


  • Tina Engler

    () (Department of Mathematics, Martin Luther University Halle-Wittenberg, 06099 Halle(Saale), Germany)

  • Ralf Korn

    () (Department of Mathematics, University of Kaiserslautern, Germany and Financial Mathematics, Fraunhofer ITWM, Fraunhofer Platz 1, 67663 Kaiserslautern, Germany)


We investigate a portfolio optimization problem under the threat of a market crash, where the interest rate of the bond is modeled as a Vasicek process, which is correlated with the stock price process. We adopt a non-probabilistic worst-case approach for the height and time of the market crash. On a given time horizon [0; T], we then maximize the investor’s expected utility of terminal wealth in the worst-case crash scenario. Our main result is an explicit characterization of the worst-case optimal portfolio strategy for the class of HARA (hyperbolic absolute risk aversion) utility functions.

Suggested Citation

  • Tina Engler & Ralf Korn, 2014. "Worst-Case Portfolio Optimization under Stochastic Interest Rate Risk," Risks, MDPI, Open Access Journal, vol. 2(4), pages 1-20, December.
  • Handle: RePEc:gam:jrisks:v:2:y:2014:i:4:p:469-488:d:42983

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    References listed on IDEAS

    1. Ralf Korn & Olaf Menkens, 2005. "Worst-Case Scenario Portfolio Optimization: a New Stochastic Control Approach," Mathematical Methods of Operations Research, Springer;Gesellschaft für Operations Research (GOR);Nederlands Genootschap voor Besliskunde (NGB), vol. 62(1), pages 123-140, September.
    2. Merton, Robert C, 1969. "Lifetime Portfolio Selection under Uncertainty: The Continuous-Time Case," The Review of Economics and Statistics, MIT Press, vol. 51(3), pages 247-257, August.
    3. repec:spr:compst:v:62:y:2005:i:1:p:123-140 is not listed on IDEAS
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    More about this item


    portfolio optimization; worst-case optimization; stochastic interest rate;

    JEL classification:

    • C - Mathematical and Quantitative Methods
    • G0 - Financial Economics - - General
    • G1 - Financial Economics - - General Financial Markets
    • G2 - Financial Economics - - Financial Institutions and Services
    • G3 - Financial Economics - - Corporate Finance and Governance
    • M2 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Economics
    • M4 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting
    • K2 - Law and Economics - - Regulation and Business Law


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