OPTIMAL DYNAMIC FUTURES PORTFOLIO UNDER A MULTIFACTOR GAUSSIAN FRAMEWORK

Tim Leung, Raphael Yan () and Yang Zhou ()
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Raphael Yan: #x2020;Department of Mathematics and Statistics, McMaster University, Hamilton, ON, Canada, L8S 4L8, Canada
Yang Zhou: Department of Applied Mathematics, University of Washington 98195, Seattle WA, USA

International Journal of Theoretical and Applied Finance (IJTAF), 2021, vol. 24, issue 05, 1-27

Abstract: We study the problem of dynamically trading futures in continuous time under a multifactor Gaussian framework. We present a utility maximization approach to determine the optimal futures trading strategy. This leads to the explicit solution to the Hamilton–Jacobi–Bellman (HJB) equations. We apply our stochastic framework to two-factor models, namely, the Schwartz model and Central Tendency Ornstein–Uhlenbeck (CTOU) model. We also develop a multiscale CTOU model, which has a fast mean-reverting and a slow mean-reverting factor in the spot asset price dynamics. Numerical examples are provided to illustrate the investor’s optimal positions for different futures portfolios.

Keywords: Futures; portfolio optimization; stochastic control; gaussian processes (search for similar items in EconPapers)
Date: 2021
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DOI: 10.1142/S021902492150028X

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