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Article
Publication date: 1 February 2003

Tomasz R. Bielecki and Stanley R. Pliska

The idea of using stochastic control methods for theoretical studies of portfolio management has long been standard, with maximum expected utility criteria commonly being…

Abstract

The idea of using stochastic control methods for theoretical studies of portfolio management has long been standard, with maximum expected utility criteria commonly being used. But in recent years a new kind of criterion, the risk sensitive criterion, has emerged from the control theory literature and been applied to portfolio management. This paper studies various economic properties of this criterion for portfolio management, thereby providing justification for its theoretical and practical use. In particular, it is shown that the risk sensitive criterion amounts to maximizing a portfolio's risk adjusted growth rate. In other words, it is essentially the same as what is commonly done in practice: find the best trade‐off between a portfolio's average return and its average volatility.

Details

Review of Accounting and Finance, vol. 2 no. 2
Type: Research Article
ISSN: 1475-7702

Keywords

Article
Publication date: 27 September 2011

Takeaki Kariya, Fumiaki Ushiyama and Stanley R. Pliska

The purpose of this paper is to generalize the one‐factor mortgage‐backed securities (MBS)‐pricing model proposed by Kariya and Kobayashi to a three‐factor model. The…

Abstract

Purpose

The purpose of this paper is to generalize the one‐factor mortgage‐backed securities (MBS)‐pricing model proposed by Kariya and Kobayashi to a three‐factor model. The authors describe prepayment behavior due to refinancing and rising housing prices by discrete‐time, no‐arbitrage pricing theory, making an association between prepayment behavior and cash flow patterns.

Design/methodology/approach

The structure, rationality and potential for practical use of our model is demonstrated by valuing an MBS via Monte Carlo simulation and then conducting a comparative static analysis.

Findings

The proposed model is found to be effective for analysing MBS cash flow patterns, making a decision for bond investments and risk management due to prepayment.

Originality/value

While the one‐factor valuation model Kariya and Kobayashi treated is a basic framework, the generalized model presented in this paper is much more effective for analysing MBS cash flow patterns, making a decision for bond investments and risk management due to prepayment.

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