Optimal dynamic basis trading
Bahman Angoshtari () and
Tim Leung ()
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Bahman Angoshtari: University of Washington
Annals of Finance, 2019, vol. 15, issue 3, No 1, 307-335
Abstract We study the problem of dynamically trading a futures contract and its underlying asset under a stochastic basis model. The basis evolution is modeled by a stopped scaled Brownian bridge to account for non-convergence of the basis at maturity. The optimal trading strategies are determined from a utility maximization problem under hyperbolic absolute risk aversion risk preferences. By analyzing the associated Hamilton–Jacobi–Bellman equation, we derive the exact conditions under which the equation admits a solution and solve the utility maximization explicitly. A series of numerical examples are provided to illustrate the optimal strategies and examine the effects of model parameters.
Keywords: Futures; Stochastic basis; Cash and carry; Scaled Brownian bridge; Risk aversion (search for similar items in EconPapers)
JEL-codes: C41 G11 G12 (search for similar items in EconPapers)
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Working Paper: Optimal Dynamic Basis Trading (2019)
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