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Risks 2014, 2(4), 469-488;

Worst-Case Portfolio Optimization under Stochastic Interest Rate Risk

Department of Mathematics, Martin Luther University Halle-Wittenberg, 06099 Halle(Saale), Germany
Department of Mathematics, University of Kaiserslautern, Germany and Financial Mathematics, Fraunhofer ITWM, Fraunhofer Platz 1, 67663 Kaiserslautern, Germany
Author to whom correspondence should be addressed.
Received: 9 October 2014 / Revised: 11 November 2014 / Accepted: 14 November 2014 / Published: 1 December 2014
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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. View Full-Text
Keywords: portfolio optimization; worst-case optimization; stochastic interest rate portfolio optimization; worst-case optimization; stochastic interest rate

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Engler, T.; Korn, R. Worst-Case Portfolio Optimization under Stochastic Interest Rate Risk. Risks 2014, 2, 469-488.

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