Interest Rate Uncertainty and Strategic Asset Allocation with Borrowing and Short Sales Constraints
Author | : Carsten Sørensen |
Publisher | : |
Total Pages | : 28 |
Release | : 2007 |
ISBN-10 | : OCLC:1290320522 |
ISBN-13 | : |
Rating | : 4/5 ( Downloads) |
Download or read book Interest Rate Uncertainty and Strategic Asset Allocation with Borrowing and Short Sales Constraints written by Carsten Sørensen and published by . This book was released on 2007 with total page 28 pages. Available in PDF, EPUB and Kindle. Book excerpt: The paper provides the solution to a dynamic portfolio problem of an investor who faces borrowing and short sales constraints in a setting with stochastic interest rates. The multi-asset dynamic problem is reduced to a constrained quadratic optimization problem which is similar to the well-known problem studied in static mean-variance portfolio theory. As an example and illustration of the general results, the paper focuses on the closed-form portfolio solution of a borrowing constrained long-term investor who cannot perfectly replicate very long-term real bonds and instead uses other securities (e.g. stocks) to hedge real interest risk. The efficiency loss due to, e.g., such a borrowing constraint is addressed.