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Engler, Tina
Korn, Ralf
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[Journal:] Risks [ISSN:] 2227-9091 [Volume:] 2 [Year:] 2014 [Issue:] 4 [Pages:] 469-488
We investigate a portfolio optimization problem under the threat of a market crash, where the interest rate of the bond is modeled as a Vasicek process, which is correlated with the stock price process. We adopt a non-probabilistic worst-case approach for the height and time of the market crash. On a given time horizon [0; T], we then maximize the investor's expected utility of terminal wealth in the worst-case crash scenario. Our main result is an explicit characterization of the worst-case optimal portfolio strategy for the class of HARA (hyperbolic absolute risk aversion) utility functions.
portfolio optimization
worst-case optimization
stochastic interest rate
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