Optimal portfolio decision rule under nonparametric characterization of the interest rate dynamics (Q2247925)

The author develops an optimal portfolio decision rule under nonparametric characterization of the interest rate dynamics. An optimal decision rule is defined based on the long rate and the spread between long and short rate. After this, a nonparametric kernel regression is used to estimate the parameters related to the above two variables. Finally, using Nadaraya-Watson estimators, from the previous stage as inputs, the decision rule is implemented by the explicit finite difference scheme to allocate optimally the wealth between short and long bonds for an investor with power utility at each time during a ten-year horizon. Some stylized facts are observed from the results obtained.