Bond portfolio optimization (Q2465190)

The author derives the Heath-Jarrow-Morton term structure framework, including two special cases, the Vasicek and the Hull-White model, by means of the stochastic discount factor pricing methodology. Static mean-variance bond portfolio selection is considered as well as the dynamic continuous-time bond portfolio selection problems are studied. The solution to a pure bond portfolio selection problem with Vasicek and Hull-White models using the stochastic control approach is derived. Then an international bond portfolio selection problem is analyzed and an explicit solution for a two-country case is derived. Derivation and interpretation of the optimum portfolio weights are considered together with the numerical examples.