Optimal Dynamic Futures Portfolio in a Regime-Switching Market Framework

23 Pages Posted: 23 Oct 2019

See all articles by Tim Leung

Tim Leung

University of Washington - Department of Applied Math

Yang Zhou

University of Washington - Department of Applied Math

Date Written: October 14, 2019

Abstract

We study the problem of dynamically trading futures in a regime-switching market. Modeling the underlying asset price as a Markov-modulated diffusion process, we present a utility maximization approach to determine the optimal futures trading strategy. This leads to the analysis of the associated system of Hamilton-Jacobi-Bellman (HJB) equations, which are reduced to a system of linear ODEs. We apply our stochastic framework to two models, namely, the Regime-Switching Geometric Brownian Motion (RS-GBM) model and Regime-Switching Exponential Ornstein-Uhlenbeck (RS-XOU) model. Numerical examples are provided to illustrate the investor's optimal futures positions and portfolio value across market regimes.

Keywords: futures trading, regime switching, portfolio optimization

JEL Classification: C41, G11, G12

Suggested Citation

Leung, Tim and Zhou, Yang, Optimal Dynamic Futures Portfolio in a Regime-Switching Market Framework (October 14, 2019). Available at SSRN: https://ssrn.com/abstract=3469721 or http://dx.doi.org/10.2139/ssrn.3469721

Tim Leung (Contact Author)

University of Washington - Department of Applied Math ( email )

Lewis Hall 217
Department of Applied Math
Seattle, WA 98195
United States

HOME PAGE: http://faculty.washington.edu/timleung/

Yang Zhou

University of Washington - Department of Applied Math ( email )

Lewis Hall 305
Department of Applied Math
Seattle, WA 98195-2420
United States
2065567421 (Phone)

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