Risk Sensitive Intertemporal CAPM

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Salehi, Najmeh | 2013

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Type of Document: M.Sc. Thesis
Language: Farsi
Document No: 44300 (02)
University: Sharif University of Technology
Department: Mathematical Sciences
Advisor(s): Alishahi, Kasra; Bahramgiri, Mohsen
Abstract:
This thesis presents an application of risk sensitive control theory in financial decision making. A variation of Merton’s continuous-time intertemporal capital asset pricing model is devolved where the infinite horizon objective is to maximize the portfolio’s risk adjusted growth rate. The resulting model is tractable and thus provides economic insight about optimal trading strategies as well as the fact that the strategy of 100% cash is not necessarily the least risky one. For fixed income applications we utilize the concept of rolling-horizon bonds, which are stochastic process models of certain mutual fund of zero coupon bonds. We show that the optimal proportion of one’s wealth to hold in an asset is given by a simple affine function of economic factors such as interest rates of various maturities
Keywords:
Risk Sensitive Control ; Optimal Portfolio ; Fixed Income ; Intertemporal Capital Asset Pricing Model (ICAPM)