A stochastic control approach to managed futures portfolios

Leung, Tim; Yan, Raphael

doi:10.1142/s2424786319500051

Cited by 16 publications

(1 citation statement)

References 14 publications

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“…Among the authors' recent related studies, Leung and Yan (2018) and Leung and Yan (2019) applied utility maximization approach to derive dynamic pairs trading strategies for futures under two-factor spot models. Most recently and relevantly, Angoshtari and Leung (2019) analyzed the problem of dynamically trading a futures contract and its underlying asset.…”

Section: Introductionmentioning

confidence: 99%

Optimal trading of a basket of futures contracts

Angoshtari

Leung

2020

Ann Finance

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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.

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Section: Introductionmentioning

confidence: 99%