CIRJE-F-299 "Dynamic Optimality of Yield Curve Strategies"
Author Name Kobayashi, Takao, Akihiko Takahashi and Norio Tokioka
Date September 2004
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Remarks Subsequently published in International Review of Finance, Vol.4, 49-78, 2003(published in 2005)
Abstract

This paper formulates and analyzes a dynamic optimization problem of bond portfolios within Markovian Heath-Jarrow-Morton term structure models. In particular, we investigate optimal yield curve strategies analytically and numerically, and provide theoretical justification for a typical strategy which is recommended in practice for an expected change in the shape of the yield curve. In the numerical analysis, we utilize a new technique based on the asymptotic expansion approach in order to increase efficiency in computation.