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Risks 2014, 2(4), 469-488; doi:10.3390/risks2040469

Worst-Case Portfolio Optimization under Stochastic Interest Rate Risk

1
Department of Mathematics, Martin Luther University Halle-Wittenberg, 06099 Halle(Saale), Germany
2
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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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. View Full-Text
Keywords: portfolio optimization; worst-case optimization; stochastic interest rate portfolio optimization; worst-case optimization; stochastic interest rate
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This is an open access article distributed under the Creative Commons Attribution License which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited. (CC BY 4.0).

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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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