Optimal Investment Strategies with a Heath-Jarrow-Morton Term Structure of Interest Rates

22 Pages Posted: 17 Dec 1999

See all articles by Claus Munk

Claus Munk

Copenhagen Business School

Carsten Sørensen

Copenhagen Business School - Department of Finance

Date Written: October 1999

Abstract

We study the consumption and investment choice of a price-taking utility-maximizing investor having access to trade in stocks and interest-rate dependent assets with a stochastically evolving term structure of interest rates. We derive explicit expressions for the optimal investment strategy of a HARA utility investor in a market where the term structure of interest rates is given by a general, possibly non-Markovian multi-factor Gaussian Heath-Jarrow-Morton term structure model and market prices of risk are deterministic. The optimal investment strategy combines the growth-optimal strategy and a single bond hedging the multi-factor interest rate risk. With utility from terminal wealth only, the hedge bond is the zero-coupon bond maturing at the horizon of the investor. With utility from intermediate consumption, the hedge bond has a continuous coupon proportional to the expected future consumption rate under the forward martingale measure.

JEL Classification: G11, G12

Suggested Citation

Munk, Claus and Sørensen, Carsten, Optimal Investment Strategies with a Heath-Jarrow-Morton Term Structure of Interest Rates (October 1999). Available at SSRN: https://ssrn.com/abstract=192928 or http://dx.doi.org/10.2139/ssrn.192928

Claus Munk (Contact Author)

Copenhagen Business School ( email )

Department of Finance
Solbjerg Plads 3
Frederiksberg, DK-2000
Denmark

HOME PAGE: http://sites.google.com/view/clausmunk/home

Carsten Sørensen

Copenhagen Business School - Department of Finance ( email )

Solbjerg Plads 3
Frederiksberg, DK-2000
Denmark

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