Optimal trading of a basket of futures contracts

Bahman Angoshtari () and Tim Leung
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Bahman Angoshtari: University of Washington

Annals of Finance, 2020, vol. 16, issue 2, No 4, 253-280

Abstract: Abstract We study the problem of dynamically trading multiple futures contracts with different underlying assets. To capture the joint dynamics of stochastic bases for all traded futures, we propose a new model involving a multi-dimensional scaled Brownian bridge that is stopped before price convergence. This leads to the analysis of the corresponding Hamilton–Jacobi–Bellman equations, whose solutions are derived in semi-explicit form. The resulting optimal trading strategy is a long-short policy that accounts for whether the futures are in contango or backwardation. Our model also allows us to quantify and compare the values of trading in the futures markets when the underlying assets are traded or not. Numerical examples are provided to illustrate the optimal strategies and the effects of model parameters.

Keywords: Futures; Stochastic basis; Brownian bridge; Utility maximization (search for similar items in EconPapers)
JEL-codes: C61 G11 G13 (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (3)

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Working Paper: Optimal Trading of a Basket of Futures Contracts (2019)
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DOI: 10.1007/s10436-019-00357-w

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