Optimal Trading of a Basket of Futures Contracts

Bahman Angoshtari and Tim Leung

Papers from arXiv.org

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 (HJB) 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.

Date: 2019-10
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http://arxiv.org/pdf/1910.04943 Latest version (application/pdf)

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Journal Article: Optimal trading of a basket of futures contracts (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:arx:papers:1910.04943

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