Dynamic Mean-Downside Risk Portfolio Selection Problem with Stochastic Interest Rate in Continuous-Time

22 Pages Posted: 30 Mar 2021

See all articles by Weiping Wu

Weiping Wu

Fuzhou University - School of Economics and Management

Ke Zhou

Hunan University - Business School

Zhicheng Li

Hunan University - Center for Economics, Finance and Management Studies

zhenpeng tang

affiliation not provided to SSRN

Date Written: March 3, 2021

Abstract

Even though a consensus has been reached a long time ago that the interest rate is a stochastic process, most of the existing works on dynamic mean-downside risk portfolio selection still focus on a deterministic interest rate. This work studies a dynamic mean-downside risk portfolio selection problem with a stochastic interest rate in a continuous-time financial market. Specifically, we choose the lower-partial moments(LPM), value-at-risk (VaR), and conditional value-at-risk(CVaR) to model our downside risk measures in the Vasicek interest rate model. By using the martingale method and the inverse Fourier Transformation, we successfully derive the semi-analytical optimal portfolio policies and the optimal wealth processes for the mean-downside risk measures with a stochastic interest rate. The results suggest that the higher the degree of negative correlation, the better the performance of the portfolio valued by mean-downside risk framework when the other market opportunity set is the same.

Keywords: Dynamic Portfolio Selection, Stochastic Interest Rate, Vasicek Model

Suggested Citation

wu, weiping and Zhou, Ke and Li, Zhicheng and tang, zhenpeng, Dynamic Mean-Downside Risk Portfolio Selection Problem with Stochastic Interest Rate in Continuous-Time (March 3, 2021). Available at SSRN: https://ssrn.com/abstract=3764540 or http://dx.doi.org/10.2139/ssrn.3764540

Weiping Wu (Contact Author)

Fuzhou University - School of Economics and Management ( email )

No. 2, Xueyuan Road, New District
No. 2, Xueyuan Road, New District
Fuzhou, Fujian 350108
China

Ke Zhou

Hunan University - Business School ( email )

Changsha, Hunan 410082
China

Zhicheng Li

Hunan University - Center for Economics, Finance and Management Studies ( email )

2 Lushan South Rd
Changsha, Hunan 410082
China

Zhenpeng Tang

affiliation not provided to SSRN

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