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Optimal Bond Portfolio for Investors with Long Time Horizons |
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| Authors: | Ryuji Fukaya Toshiki Honda |
| Institution: | (1) The Dai-ichi Mutual Life Insurance Company, Graduate School of Mathematical Science, University of Tokyo, Japan;(2) Graduate School of International Corporate Strategy, Hitotsubashi University, 2-1-2 Hitotsubashi, Chiyoda-ku, Tokyo, 101-8439, Japan |
| Abstract: | We study the optimal bond portfolio for an investor with long time horizonusing Japanese interest rate data. A simple one-factor term structure modelis used for our numerical example. The optimal portfolio is computed using thetechnique of stochastic flows and Monte Carlo simulation. The hedgingportfolio is not negligible and the mean variance portfolio is very sensitiveto parameter values. The optimal portfolio is highly leveraged for a typicalparameter value. The investor holds a zero-coupon bond because of the lowerbound restriction on investor's wealth. The lower bound constraint may makethe optimal portfolio more realistic. |
| Keywords: | dynamic optimal portfolio hedging portfolio minimum-wealth constraint stochastic control stochastic flows term-structure models |
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