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How to Manage Inflation Risk in an Asset Allocation Problem : an Algebric Aproximated Solution

Author

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  • Francesco MENONCIN

    (UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES))

Abstract

This paper analyses the portfolio problem of an invetsor who wants to maximize the expected utility of his terminal real wealth in an incomplete financial market. The investor must cope with a set of stochastic investment opportunities and inflation risk following a jump-diffusion process. We investigate how the inflation risk affects the optimal portfolio composition and, at this aim, we present an approximated analytical solution to the portfolio choice problem based on the Feynman-Kac representation theorem. Finally, we compare our approximate solution with some exact solutions available in the literature and we find that the main qualitative results are maintained.

Suggested Citation

  • Francesco MENONCIN, 2001. "How to Manage Inflation Risk in an Asset Allocation Problem : an Algebric Aproximated Solution," Discussion Papers (IRES - Institut de Recherches Economiques et Sociales) 2001035, Universit√© catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES).
  • Handle: RePEc:ctl:louvir:2001035
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    References listed on IDEAS

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    More about this item

    Keywords

    asset allocation; inflation risk; Feynan-kac theorem; stochastic investment opportunities;

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis

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