Optimal Consumption and Investment Strategies with Stochastic Interest Rates

Posted: 17 Jun 2004

See all articles by Claus Munk

Claus Munk

Copenhagen Business School

Carsten Sørensen

Copenhagen Business School - Department of Finance

Multiple version iconThere are 2 versions of this paper

Abstract

We characterize the solution to the consumption and investment problem of a power utility investor in a continuous-time dynamically complete market with stochastic changes in the opportunity set. Under stochastic interest rates the investor optimally hedges against changes in the term structure of interest rates by investing in a coupon bond, or portfolio of bonds, with a payment schedule that equals the forward-expected (i.e. certainty equivalent) consumption pattern. Numerical experiments with two different specifications of the term structure dynamics (the Vasicek model and a three-factor non-Markovian Heath-Jarrow-Morton model) suggest that the hedge portfolio is more sensitive to the form of the term structure than to the dynamics of interest rates.

Keywords: Dynamic asset allocation, hedging, term structure of interest rates

JEL Classification: G11

Suggested Citation

Munk, Claus and Sørensen, Carsten, Optimal Consumption and Investment Strategies with Stochastic Interest Rates. Journal of Banking and Finance, Vol. 28, No. 8, pp. 1987-2013, 2004, Available at SSRN: https://ssrn.com/abstract=556563

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

Here is the Coronavirus
related research on SSRN

Paper statistics

Abstract Views
639
PlumX Metrics