Optimal dynamic basis trading

DOI10.1007/S10436-019-00348-XMaRDI QIDQ2334405zbMATH OpenOpenAlexFDO

Authors Bahman Angoshtari, Tim Leung

Publication date 7 November 2019

Published in Annals of Finance (Search for Journal in Brave)

Full work available at URL https://arxiv.org/abs/1809.05961

zbMATH Keywords

cash and carryfuturesrisk aversionscaled Brownian bridgestochastic basis

Mathematics Subject Classification ID

Derivative securities (option pricing, hedging, etc.) (91G20)

Abstract: 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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Cites work

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Cited in

(8)

• Optimal trading of a basket of futures contracts
• Optimal bitcoin trading with inverse futures
• Constrained dynamic futures portfolios with stochastic basis
• Futures and futures options with basis risk: theoretical and empirical perspectives
• Optimal dynamic futures portfolio under a multifactor Gaussian framework
• Optimal pairs trading of mean-reverting processes over multiple assets
• Optimal stopping of Gauss-Markov bridges
• A CTRW-driven subdiffusive fractional Brownian bridge in the reconstruction of missing experimental data

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