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Annals of Finance

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10.06.2019 | Research Article

Optimal dynamic basis trading

verfasst von: Bahman Angoshtari, Tim Leung

Erschienen in: Annals of Finance | Ausgabe 3/2019

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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 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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See Remark 1.

That is, the number of futures contracts held multiplied by the futures price.

See Remark 1.

Recall that \(\gamma =1\) corresponds to the logarithmic utility which we have excluded from our analysis.

This ansatz can be derived through the power transformation introduced by Zariphopoulou (2001). See, also, Kim and Omberg (1996), among others.

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Titel: Optimal dynamic basis trading
verfasst von: Bahman Angoshtari
Tim Leung
Publikationsdatum: 10.06.2019
Verlag: Springer Berlin Heidelberg
Erschienen in: Annals of Finance / Ausgabe 3/2019
Print ISSN: 1614-2446
Elektronische ISSN: 1614-2454
DOI: https://doi.org/10.1007/s10436-019-00348-x

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