An Investment and Consumption Problem with CIR Interest Rate and Stochastic Volatility

Hao Chang and Xi-min Rong

Abstract and Applied Analysis, 2013, vol. 2013, issue 1

Abstract: We are concerned with an investment and consumption problem with stochastic interest rate and stochastic volatility, in which interest rate dynamic is described by the Cox‐Ingersoll‐Ross (CIR) model and the volatility of the stock is driven by Heston’s stochastic volatility model. We apply stochastic optimal control theory to obtain the Hamilton‐Jacobi‐Bellman (HJB) equation for the value function and choose power utility and logarithm utility for our analysis. By using separate variable approach and variable change technique, we obtain the closed‐form expressions of the optimal investment and consumption strategy. A numerical example is given to illustrate our results and to analyze the effect of market parameters on the optimal investment and consumption strategies.

Date: 2013
References: Add references at CitEc
Citations:

Downloads: (external link)
https://doi.org/10.1155/2013/219397

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:wly:jnlaaa:v:2013:y:2013:i:1:n:219397

Access Statistics for this article

More articles in Abstract and Applied Analysis from John Wiley & Sons
Bibliographic data for series maintained by Wiley Content Delivery ().