Risk Sensitive Control with Applications to Fixed Income Portfolio Management

This paper presents an application of risk sensitive control theory in financial decision making. Specifically, we develop optimal, risk-sensitive investment strategies for a long-term investor who is interested in optimal allocation of her/his capital between cash, equities and fixed income instruments. The long-term fixed income instruments used are so called rolling-horizon bonds. In order to construct the optimal risk-sensitive control policies relevant for the present application we advance the risk sensitive control theory developed in our previous papers.