Stochastic differential portfolio games with Duffie‐Kan interest rate
Abstract
Purpose
The purpose of this paper is to research stochastic dynamic investment games with stochastic interest rate model in continuous time between two investors. The market interest rate has the dynamics of Duffie‐Kan interest rate.
Design/methodology/approach
Recently, there has been an increasing interest in financial market models whose key parameters, such as the bank interest rate, stocks appreciation rates, and volatility rates, are modulated by stochastic interest rate. This paper uses the Duffie‐Kan stochastic interest rate model to develop stochastic differential portfolio games. By the HJB optimality equation, a general result in optimal control for a stochastic differential game with a general utility payoff function is obtained.
Findings
Derive a general result in optimal control for a stochastic differential game with a general utility payoff function. The explicit optimal strategies and value of the games are obtained for the constant relative risk aversion utility games of fixed duration.
Research limitations/implications
Accessibility and availability of stochastic interest rate data are the main limitations, which apply.
Practical implications
The results obtained in this paper could be used as a guide to actual portfolio games.
Originality/value
This paper presents a new approach for the optimal portfolio model under compound jump processes. The paper is aimed at actual portfolio games.
Keywords
Citation
Wan, S. (2010), "Stochastic differential portfolio games with Duffie‐Kan interest rate", Kybernetes, Vol. 39 No. 8, pp. 1282-1290. https://doi.org/10.1108/03684921011063565
Publisher
:Emerald Group Publishing Limited
Copyright © 2010, Emerald Group Publishing Limited