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2012•Journal of Chongqing Technology and Business UniversityRequires access

Optimal Portfolio Selection with Regime-switching Considering Stochastic Interest Rates and Default Risk

Xiaojie Wang

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Abstract

This paper studies Markov modulated regime-switching market model which concerns about macro-factor influencing financial market in which stochastic interest rates follow Vasicek Model and default risk abides by CIR Model.The optimal portfolio under the described market is studied,the closed-form solution to HJB equation is obtained by using dynamic program principle and partial differential equation theory,meanwhile,it is proved that the solution to HJB equation is value function of optimal portfolio,and explicit expression of optimal investment strategy is got.

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What this paper is about

This paper studies Markov modulated regime-switching market model which concerns about macro-factor influencing financial market in which stochastic interest rates follow Vasicek Model and default risk abides by CIR Model.The optimal portfolio under the described market is studied,the closed-form solution to HJB equation is obtained by using dynamic program principle and partial differential equation theory,meanwhile,it is proved that the solution to HJB equation is value function of optimal portfolio,and explicit expression of optimal investment strategy is got.

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Available abstract

This paper studies Markov modulated regime-switching market model which concerns about macro-factor influencing financial market in which stochastic interest rates follow Vasicek Model and default risk abides by CIR Model.The optimal portfolio under the described market is studied,the closed-form solution to HJB equation is obtained by using dynamic program principle and partial differential equation theory,meanwhile,it is proved that the solution to HJB equation is value function of optimal portfolio,and explicit expression of optimal investment strategy is got.

Key concepts: Hamilton–Jacobi–Bellman equation, Vasicek model, Portfolio, Bellman equation, Interest rate, Partial differential equation, Mathematical optimization, Cox–Ingersoll–Ross model

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