Optimal portfolios with anticipating information on the stochastic interest rate

Bernardo D’Auria () and José A. Salmeron ()
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Bernardo D’Auria: University of Padova
José A. Salmeron: Directorate General for the Regulation of Gambling

Decisions in Economics and Finance, 2025, vol. 48, issue 1, No 16, 328 pages

Abstract: Abstract By employing the technique of enlargement of filtrations, we demonstrate how to incorporate information about the future trend of the stochastic interest rate process into a financial model. By modeling the interest rate as an affine diffusion process, we obtain explicit formulas for the additional expected logarithmic utility in solving the optimal portfolio problem. We begin by solving the problem when the additional information directly refers to the interest rate process, and then extend the analysis to the case where the information relates to the values of an underlying Markov chain. The dynamics of this chain may depend on anticipated market information, jump at predefined epochs, and modulate the parameters of the stochastic interest rate process. The theoretical study is then complemented by an illustrative numerical analysis.

Keywords: Stochastic control; Portfolio choice; Enlargement of filtrations; Vasicek short-rate model; Additional logarithmic expected utility; Markovian modulation (search for similar items in EconPapers)
JEL-codes: D82 G11 G14 (search for similar items in EconPapers)
Date: 2025
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DOI: 10.1007/s10203-024-00463-z

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