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Optimal Dynamic Futures Portfolio Under A Multifactor Gaussian Framework

Author

Listed:
  • TIM LEUNG

    (Department of Applied Mathematics, University of Washington 98195, Seattle WA, USA)

  • 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)

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.

Suggested Citation

  • Tim Leung & Raphael Yan & Yang Zhou, 2021. "Optimal Dynamic Futures Portfolio Under A Multifactor Gaussian Framework," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 24(05), pages 1-27, August.
    • Handle: RePEc:wsi:ijtafx:v:24:y:2021:i:05:n:s021902492150028x
    DOI: 10.1142/S021902492150028X
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    Cited by:

    1. Xiaodong Chen & Tim Leung & Yang Zhou, 2022. "Constrained dynamic futures portfolios with stochastic basis," Annals of Finance, Springer, vol. 18(1), pages 1-33, March.

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