On the Asset Allocation Problem under Inflation,Short and Long Stochastic Interest Rates Risks

Inflation can be considered as a background risk affecting only the wealth growth rate without altering the amount of wealth that can be invested.Almost all the literature about the optimal portfolio rules does not consider the inflation rate.The interest towards the inflation risk has risen only in recent period.Nevertheless,when a long(and even medium) period of time is considered,the inflation risk and its hedging cannot be neglected.There is a defect for the one factor model of interest rates that the prices of the bonds with different but correlative maturities.A bank account,nominal bonds,and stocks can be traded.This paper provides an optimal asset allocation strategy with interest rate risk and inflation risk.The Hull White two-factor model represents uncertainty about future interest rates.