Dynamic Optimality of Yield Curve Strategies*

Takao Kobayashi (), Akihiko Takahashi and Norio Tokioka

International Review of Finance, 2003, vol. 4, issue 1‐2, 49-78

Abstract: This paper formulates and analyzes a dynamic optimization problem of bond portfolios within Markovian Heath–Jarrow–Morton term structure models. In particular, we investigate optimal yield curve strategies analytically and numerically, and provide theoretical justification for a typical strategy which is recommended in practice for an expected change in the shape of the yield curve. In the numerical analysis, we utilize a new technique based on the asymptotic expansion approach in order to increase efficiency in computation.

Date: 2003
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International Review of Finance is currently edited by Bruce D. Grundy, Naifu Chen, Ming Huang, Takao Kobayashi and Sheridan Titman

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