OPTIMAL ASSET ALLOCATION PROBLEM FOR AN INVESTOR WITH ORNSTEN-UHLEBECK STOCHASTIC INTEREST RATE MODEL
SILAS A. IHEDIOHA *
Department of Mathematics, Plateau State University, Bokkos, P.M.B. 2012, Jos, Plateau State, Nigeria
*Author to whom correspondence should be addressed.
This work considered that an investor’s portfolio is comprised of two assets- a risky stock which price process is driven by the geometric Brownian motion and a risk-free asset with Ornstein-Uhlenbeck Stochastic interest rate of return, where consumption, taxes, transaction costs and dividends are in involved. The application of the maximum principle obtained the Hamilton-Jacobi-Bellman (HJB) equation for the value function on which elimination of variable dependency was applied to obtain the close form solution of the optimal investment strategy.
Keywords: Asset allocation, investor, stochastic, interest rate, Hamilton-Jacobi-Bellman (HJB), maximum principle