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Dynamic Asset Allocation and Fixed Income Management

Published online by Cambridge University Press:  06 April 2009

Carsten Sørensen
Carsten Sørensen
Affiliation:
Department of Finance, Copenhagen Business School, Rosenørns Allé 31, DK-1970 Frederiksberg, Denmark.
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Abstract

This paper provides the solution to an intertemporal investment problem. The investor has power utility and can invest in stocks and bonds in a complete market setting where the Vasicek term structure model applies. The paper demonstrates that the zero-coupon bond with maturity at the investment horizon is the appropriate instrument for hedging changes in the opportunity set. Implementation issues are discussed and it is shown how the intertemporal investment problem can be recast as a series of mean-variance problems in terms of drift and volatility of the wealth forward price. An application based on a quasi-dynamic programming approach is considered.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 34 , Issue 4 , December 1999 , pp. 513 - 531
Copyright
Copyright © School of Business Administration, University of Washington 1999

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