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Optimal dynamic basis trading

  • Bahman Angoshtari
  • Tim LeungEmail author
Research Article
  • 6 Downloads

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.

Keywords

Futures Stochastic basis Cash and carry Scaled Brownian bridge Risk aversion 

JEL Classification

C41 G11 G12 

Notes

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Copyright information

© Springer-Verlag GmbH Germany, part of Springer Nature 2019

Authors and Affiliations

  1. 1.Applied Mathematics DepartmentUniversity of WashingtonSeattleUSA

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