Optimal Consumption and Portfolio Decision with Convertible Bond in Affine Interest Rate and Heston’s SV Framework

Abstract

We are concerned with an optimal investment-consumption problem with stochastic affine interest rate and stochastic volatility, in which interest rate dynamics are described by the affine interest rate model including the Cox-Ingersoll-Ross model and the Vasicek model as special cases, while stock price is driven by Heston’s stochastic volatility (SV) model. Assume that the financial market consists of a risk-free asset, a zero-coupon bond (or a convertible bond), and a risky asset. By using stochastic dynamic programming principle and the technique of separation of variables, we get the HJB equation of the corresponding value function and the explicit expressions of the optimal investment-consumption strategies under power utility and logarithmic utility. Finally, we analyze the impact of market parameters on the optimal investment-consumption strategies by giving a numerical example.

Optimal Investment Strategies for DC-Pension Fund under Combined Stochastic Volatility Models

“…The model will enable us determine with certain accuracy, tractability and efficiency when pricing derivatives on equity returns and the effect of interest rates. As the pension management and the plan members are given more flexibilities to select without restrictions appropriate benefit outgo, the optimal benefit outgo is described as control variable in recent literatures [15,16]. In Kapu and Orszag [17], the benefit outgo is dynamically chosen by the PFM to achieve the plan member's objectives.…”

“…are the proportions of wealth invested in stock (bond) and the proportion of wealth invested in risk-free asset at time 𝑡 𝑖𝑠 𝜋 0 (𝑡) = 1 − 𝜋 𝐵 (𝑡) − 𝜋 𝑆 (𝑡). We denote 𝑋 𝜋 (𝑡) as the wealth amount in the DC pension account at time 𝑡 underinvestment strategy 𝜋 is stated in (16).…”