Portfolio Selection with Random Liability and Affine Interest Rate in the Mean-Variance Framework

Chang Hao (), Wang Chunfeng () and Fang Zhenming ()
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Chang Hao: College of Management and Economics, Tianjin University, Tianjin300072, China
Wang Chunfeng: College of Management and Economics, Tianjin University, Tianjin300072, China
Fang Zhenming: College of Management and Economics, Tianjin University, Tianjin300072, China

Journal of Systems Science and Information, 2017, vol. 5, issue 3, 229-249

Abstract: This paper studies a dynamic mean-variance portfolio selection problem with random liability in the affine interest rate environment, where the financial market consists of three assets: one risk-free asset, one risky asset and one zero-coupon bond. Assume that short rate is driven by affine interest rate model and liability process is described by the drifted Brownian motion, in addition, stock price dynamics is affected by interest rate dynamics. The investors expect to look for an optimal strategy to minimize the variance of the terminal surplus for a given expected terminal surplus. The efficient strategy and the efficient frontier are explicitly obtained by applying dynamic programming principle and Lagrange duality theorem. A numerical example is given to illustrate our results and some economic implications are analyzed.

Keywords: affine interest rate; random liability; mean-variance criterion; the efficient strategy; the efficient frontier; Lagrange duality theorem (search for similar items in EconPapers)
Date: 2017
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Persistent link: https://EconPapers.repec.org/RePEc:bpj:jossai:v:5:y:2017:i:3:p:229-249:n:3

DOI: 10.21078/JSSI-2017-229-21

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