Constrained dynamic futures portfolios with stochastic basis

Xiaodong Chen (), Tim Leung and Yang Zhou ()
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Xiaodong Chen: University of Chicago
Yang Zhou: University of Washington

Annals of Finance, 2022, vol. 18, issue 1, No 1, 33 pages

Abstract: Abstract We study the problem of dynamically trading multiple futures contracts on different underlying assets subject to portfolio constraints. The spreads between futures and spot prices are modeled by a multidimensional scaled Brownian bridge to account for their convergence at maturity. Under this stochastic basis model, we apply the stochastic control approach to rigorously derive the optimal trading strategies via utility maximization. This leads to the analysis of the associated system of Hamilton-Jacobi-Bellman equations, which are reduced to a system of ODEs. A series of numerical examples are provided to illustrate the optimal strategies and wealth distributions under different portfolio constraints.

Keywords: Futures portfolio; Futures basis; Portfolio constraints; Utility maximization (search for similar items in EconPapers)
JEL-codes: C61 G11 G13 (search for similar items in EconPapers)
Date: 2022
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DOI: 10.1007/s10436-021-00398-0

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