2018/09/16 by Angoshtari, Bahman, Leung, Tim
#91B06 #91B08 #91B70 #91G10 #91G80 #FOS: Economics and business #Portfolio Management (q-fin.PM)
paper · doi:10.48550/arxiv.1809.05961
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 (HARA) 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.