Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/178550
Authors: 
Kiriakopoulos, Konstantinos
Koulis, Alexandros
Year of Publication: 
2014
Citation: 
[Journal:] Journal of Risk and Financial Management [ISSN:] 1911-8074 [Volume:] 7 [Year:] 2014 [Issue:] 4 [Pages:] 130-149
Abstract: 
In this paper we formulate the Risk Management Control problem in the interest rate area as a constrained stochastic portfolio optimization problem. The utility that we use can be any continuous function and based on the viscosity theory, the unique solution of the problem is guaranteed. The numerical approximation scheme is presented and applied using a single factor interest rate model. It is shown how the whole methodology works in practice, with the implementation of the algorithm for a specific interest rate portfolio. The recent financial crisis showed that risk management of derivatives portfolios especially in the interest rate market is crucial for the stability of the financial system. Modern Value at Risk (VAR) and Conditional Value at Risk (CVAR) techniques, although very useful and easy to understand, fail to grasp the need for on-line controlling and monitoring of derivatives portfolio. The portfolios should be designed in a way that risk and return be quantified and controlled in every possible state of the world. We hope that this methodology contributes towards this direction.
Subjects: 
stochastic portfolio optimization
stochastic control
interest rate derivatives
sensitivity constraints
JEL: 
G11
G12
G32
C61
Persistent Identifier of the first edition: 
Creative Commons License: 
https://creativecommons.org/licenses/by/4.0/
Document Type: 
Article
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