Worst-Case Portfolio Optimization under Stochastic Interest Rate Risk

Tina Engler and Ralf Korn
Additional contact information
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

Risks, 2014, vol. 2, issue 4, 1-20

Abstract: 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.

Keywords: portfolio optimization; worst-case optimization; stochastic interest rate (search for similar items in EconPapers)
JEL-codes: C G0 G1 G2 G3 K2 M2 M4 (search for similar items in EconPapers)
Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
https://www.mdpi.com/2227-9091/2/4/469/pdf (application/pdf)
https://www.mdpi.com/2227-9091/2/4/469/ (text/html)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:gam:jrisks:v:2:y:2014:i:4:p:469-488:d:42983

Access Statistics for this article

Risks is currently edited by Mr. Claude Zhang

More articles in Risks from MDPI
Bibliographic data for series maintained by MDPI Indexing Manager ().