Dynamic mean-variance asset allocation with stochastic interestrate and inflation rate

Haixiang Yao; Zhongfei Li; Yongzeng Lai

doi:10.3934/jimo.2016.12.187

Article Contents

2016, Volume 12, Issue 1: 187-209. Doi: 10.3934/jimo.2016.12.187

This issue Previous Article Robust output stabilization for a class of nonlinear uncertain stochastic systems under multiplicative and additive noises: The attractive ellipsoid method Next Article A new approach for allocating fixed costs among decision making units

Dynamic mean-variance asset allocation with stochastic interest rate and inflation rate

1.
School of Finance, Guangdong University of Foreign Studies, Guangzhou 510006
2.
Lingnan (University) College/Sun Yat-sen Business School, Sun Yat-sen University, Guangzhou 510275
3.
Department of Mathematics, Wilfrid Laurier University, Waterloo, Ontario, N2L 3C5

Received: April 30, 2014

Revised: November 30, 2014

Published: December 2015

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Abstract

This paper studies dynamic asset allocation with stochastic interest rates and inflation rates under the continuous-time mean-variance model in a more general market that may be incomplete. First, by the Lagrange method and the dynamic programming approach, we derive the associated Hamilton-Jacobi-Bellman equation and solve it explicitly. Then, closed form expressions for the efficient strategy and the efficient frontier are derived by applying the Lagrange dual theory. In addition, we state a necessary and sufficient condition under which the efficient frontier is a straight line in the standard deviation-mean plane, and some degenerate cases are discussed. Finally, empirical analysis based on real data from the Chinese market is presented to illustrate applications of the results obtained in this paper.

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Mathematics Subject Classification: Primary: 90C26; Secondary: 91B28, 49N15.

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