We consider a portfolio optimization problem under stochastic volatility as well as stochastic interest rate on an infinite time horizon. It is assumed that risky asset prices follow geometric Brownian motion and both volatility and interest rate vary according to ergodic Markov diffusion processes and are correlated with risky asset price. We use an asymptotic method to obtain an optimal consumption and investment policy and find some characteristics of the policy depending upon the correlation between the underlying risky asset price and the stochastic interest rate.
Bibliographical noteFunding Information:
The work of the first author was supported by the Brain Korea 21 Project at Yonsei University, 2010. The work of the second author was supported by Basic Science Research Program through the National Research Foundation of Korea funded by the Ministry of Education, Science and Technology (NRF-2010-0008717) and in part by the MKE and KIAT through the Workforce Development Program in Strategic Technology.
All Science Journal Classification (ASJC) codes
- Applied Mathematics