BFS 2002

Contributed Talk

We develop methods of risk sensitive impulsive control theory in order to solve an optimal asset allocation problem with transaction costs and a stochastic interest rate. The optimal trading strategy and the risk-sensitized expected exponential growth rate of the investor's portfolio are characterized in terms of a nonlinear quasi-variational inequality. This problem can then be interpreted as the ergodic Isaac-Hamilton-Jacobi equation associated with a min-max problem. We use a numerical method based on an extended two-stage Howard-Gaubert algorithm and provide numerical results for the case of two assets and one factor that is a Vasicek interest rate.