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

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  • Tim Leung
  • Yang Zhou

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 positions and optimal wealth over time.

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  • Tim Leung & Yang Zhou, 2021. "Optimal Dynamic Futures Portfolios Under a Multiscale Central Tendency Ornstein-Uhlenbeck Model," Papers 2102.12601, arXiv.org.
    • Handle: RePEc:arx:papers:2102.12601
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    References listed on IDEAS

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    1. Cortazar, Gonzalo & Lopez, Matias & Naranjo, Lorenzo, 2017. "A multifactor stochastic volatility model of commodity prices," Energy Economics, Elsevier, vol. 67(C), pages 182-201.
    2. Gonzalo Cortazar & Lorenzo Naranjo, 2006. "An N‐factor Gaussian model of oil futures prices," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 26(3), pages 243-268, March.
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