Optimal Dynamic Futures Portfolio in a Regime-Switching Market Framework
Portfolio Management
2019-10-16 v1
Abstract
We study the problem of dynamically trading futures in a regime-switching market. Modeling the underlying asset price as a Markov-modulated diffusion process, we present a utility maximization approach to determine the optimal futures trading strategy. This leads to the analysis of the associated system of Hamilton-Jacobi-Bellman (HJB) equations, which are reduced to a system of linear ODEs. We apply our stochastic framework to two models, namely, the Regime-Switching Geometric Brownian Motion (RS-GBM) model and Regime-Switching Exponential Ornstein-Uhlenbeck (RS-XOU) model. Numerical examples are provided to illustrate the investor's optimal futures positions and portfolio value across market regimes.
Keywords
Cite
@article{arxiv.1910.06432,
title = {Optimal Dynamic Futures Portfolio in a Regime-Switching Market Framework},
author = {Tim Leung and Yang Zhou},
journal= {arXiv preprint arXiv:1910.06432},
year = {2019}
}