Optimal Dynamic Basis Trading
Bahman Angoshtari and
Tim Leung ()
Papers from arXiv.org
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 (HARA) 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.
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Date: 2018-09, Revised 2019-05
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Journal Article: Optimal dynamic basis trading (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:arx:papers:1809.05961
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