Optimal portfolios with stochastic interest rates and defaultable assets. (Q1880663)

This book is written for readers with a proknowledge in stochastic control theory and portfolio theory. It describes portfolio problems with stochastic interest rates and with defaultable assets. After summing up results of the theory of stochastic control relevant for the further considerations (chapter 1), portfolio problems where the interest rates are governed by other common short rate models are regarded (chapter 2). An elasticity approach to portfolio optimization follows in chapter 3. Chapter 4 treats barrier derivatives with curved boundaries. Chapter 5 describes optimal portfolios with defaultable assets. In chapter 1 (Preliminaries from Stochastics), stochastic differential equations and optimal stochastic control are treated. Chapter 2 (Optimal Portfolios with Stochastic Interest Rates) analyses portfolio problems with interest rate dynamics of the economy described by the Ho-Lee and Vasicek model, the Dothan model, the Black-Karasinski model, and the Cox-Ingersoll-Ross model. Chapter 3 (Elasticity Approach to the Portfolio Optimization) shows that an investor optimizes his portfolio over elasticities and duration in the case of stochastic interest rates. After Björk's result chapter 4 (Derivatives with Curved Boundaries) considers a claim subject to a deterministic exponential boundary. Then, a problem assuminq a Gaussian interest rate model and a discounted boundary is described. As application, defaultable bonds are priced. Chapter 5 (Optimal Portfolios with Defaultable Assets -- A Firm Value Approach) solves portfolio problems when the investor can put funds into defaultable assets. After solving the simplifying approach of the usual problem and ignoring the upper bounds on the numbers of stocks and bonds, it looks at the probability that the solution computed without the above constraints violates these constraints. The general constrained problem is solved under the assumption that the investor maximizes utility from terminal wealth with respect to a logarithmic utility function.