Optimal portfolios in commodity futures markets

Fred Benth () and Jukka Lempa

Finance and Stochastics, 2014, vol. 18, issue 2, 407-430

Abstract: We develop a general approach to portfolio optimization in futures markets. Following the Heath–Jarrow–Morton (HJM) approach, we model the entire futures price curve at once as a solution of a stochastic partial differential equation. We also develop a general formalism to handle portfolios of futures contracts. In the portfolio optimization problem, the agent invests in futures contracts and a risk-free asset, and her objective is to maximize the utility from final wealth. In order to capture self-consistent futures price dynamics, we study a class of futures price curve models which admit a finite-dimensional realization. More precisely, we establish conditions under which the futures price dynamics can be realized in finite dimensions. Using the finite-dimensional realization, we derive a finite-dimensional form of the portfolio optimization problem and study its solution. We also give an economic interpretation of the coordinate process driving the finite-dimensional realization. Copyright Springer-Verlag Berlin Heidelberg 2014

Keywords: Futures contract; Commodity markets; Optimal portfolios; Stochastic partial differential equations; Finite-dimensional realization; Invariant foliation; 91G10; 60H15; G11; G13; C61 (search for similar items in EconPapers)
Date: 2014
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Citations: View citations in EconPapers (7)

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Working Paper: Optimal portfolios in commodity futures markets (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:spr:finsto:v:18:y:2014:i:2:p:407-430

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DOI: 10.1007/s00780-013-0224-5

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