Multi-period mean-variance portfolio selection with stochastic interest rate and uncontrollable liability

Abstract

While the literature on dynamic portfolio selection with stochastic interest rates only confines its investigation to the continuous-time setting up to now, this paper studies a multi-period mean-variance portfolio selection problem with a stochastic interest rate, where the movement of the interest rate is governed by the discrete-time Vasicek model. Invoking dynamic programming approach and the Lagrange duality theory, we derive the analytical expressions for both the efficient investment strategy and the efficient mean-variance frontier of the model formulation. We then extend our model to the situation with an uncontrollable liability.