Korean Management Science Review (경영과학)

The Korean Operations Research and Management Science Society (한국경영과학회)
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Optimal Asset Allocation with Minimum Performance and Inflation Risk

최소 자산제약 및 인플레이션을 고려한 자산 할당에 관한 연구

  • 임병화 (수원대학교 금융공학대학원)
  • Received : 2013.03.07
  • Accepted : 2013.03.15
  • Published : 2013.03.31
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Abstract

We investigate the dynamic asset allocation problem under inflation risk when the wealth of an investor is constrained with minimum requirements. To capture the investor's risk preference, the CRRA utility function is considered and he maximizes his expected utility at predetermined date of the refund by participation in the financial market. The financial market is supposed to consist of three kinds of financial instruments which are a risk free asset, a risky asset, and an index bond. The role of an index bond is managing inflation risk represented by price process. The optimal wealth and the optimal asset allocation are derived explicitly by using the method to get the European call option pricing formula. From the numerical results, it is confirmed that the investments on index bond is high when the investor's wealth level is low. However, as his wealth increases, the investments on index bond decreases and he invests on risky asset more. Furthermore, the minimum wealth constraint induces lower investment on risky asset but the effect of the constraints is reduced as the wealth level increases.

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References

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