Optimal Dynamic Futures Portfolios Under a Multiscale Central Tendency Ornstein-Uhlenbeck Model

6 Pages Posted: 3 Nov 2020 Last revised: 25 Feb 2021

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: September 14, 2020

Abstract

We study the problem of dynamically trading multiple futures whose underlying asset price follows a multiscale central tendency Ornstein-Uhlenbeck (MCTOU) model. Under this model, we derive the closed-form no-arbitrage prices for the futures contracts. Applying a utility maximization approach, we solve for the optimal trading strategies under different portfolio configurations by examining the associated system of Hamilton-Jacobi-Bellman (HJB) equations. The optimal strategies depend on not only the parameters of the underlying asset price process but also the risk premia embedded in the futures prices. Numerical examples are provided to illustrate the investor's optimal futures positions and optimal wealth over time.

Keywords: futures trading, portfolio optimization

JEL Classification: C41, G11, G12

Suggested Citation

Leung, Tim and Zhou, Yang, Optimal Dynamic Futures Portfolios Under a Multiscale Central Tendency Ornstein-Uhlenbeck Model (September 14, 2020). Available at SSRN: https://ssrn.com/abstract=3692142 or http://dx.doi.org/10.2139/ssrn.3692142

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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