Optimal investment policy for a company under inflation risk
DOI:
https://doi.org/10.14738/assrj.71.7632Keywords:
Optimal investment policy, Inflation risk, HJB equations, CRRA utility, risky assetAbstract
In this paper, we consider the optimal investment control problem for a company who worries about inflation risk. We assume that the company is self-financing. The decision maker of the company can invest in a financial market consisting of two assets: one risk-free asset, one risky asset. Our purpose is to find the impacts of inflation on optimal investment policy. With the objective of maximizing the CRRA utility of terminal wealth, the closed-form solutions of the optimal investment policy are obtained by solving HJB equations. We find that the optimal investment policy is affected by the correlation coefficient between the price of risky asset and price index.
References
[2] Bayraktar, E., Zhang, Y., Minimizing the probability of lifetime ruin under ambiguity aversion. SIAM J. Control Optim., 2015, 53(1):58-90.
[3] Browne, S., Optimal investment policies for a firm with a random risk process: exponential utility and minimizing the probability of ruin. Mathematics of Operations Research, 1995, 20:937--958.
[4] Browne, S., Beating a moving target: Optimal portfolio strategies for outperforming a stochastic benchmark. Finance and Stochastics, 1999, 3(3):275-294.
[5] Browne, S., Risk-constrained dynamic active portfolio management. Management Science, 2000a, 46(9):1188–1199.
[6] Browne, S., Stochastic differential portfolio games. Journal of Applied Probability, 2000b, 37(1):126-147.
[7] Fleming, W.H., Soner, M.. Controlled Markov Processes and Viscosity Solutions, 2nd edition. Springer, 2006, New York.
[8] Karatzas, I., Optimization problems in the theory of continuous trading. SIAM J. Control. And Optim. 1989, 7:1221-1259.
[9] Maenhout, P.J., Robust portfolio rules and asset pricing. Review of Financial Studies, 2004, 17(4):951-983.
[10] Markowitz, H.M., Portfolio Selection. Journal of Finance, 1952, 7:77-91.
[11] Merton, R.C., Lifetime portfolio selection under uncertainty: The continuous-time case. Review of Economics and Statistics, 1969, 51(3):247-257.
[12] Merton, R.C., Optimum consumption and portfolio rules in a continuous-time model. Journal of Economic Theory, 1971, 3(4):373-413.
[13] Pliska, S.R., Ye, J., Optimal life insurance purchase and consumption/investment under uncertain lifetime. Journal of Banking and Finance, 2007, 31(5):1307-1319.
[14] Young, V. R., Zhang, Y., Lifetime ruin under ambiguous hazard rate. Insurance Mathematics and Economics, 2016, 70:125-134.
Downloads
Published
How to Cite
Issue
Section
License
Authors wishing to include figures, tables, or text passages that have already been published elsewhere are required to obtain permission from the copyright owner(s) for both the print and online format and to include evidence that such permission has been granted when submitting their papers. Any material received without such evidence will be assumed to originate from the authors.