Optimal portfolios in commodity futures markets

TL;DR

This paper develops a finite-dimensional control framework for optimizing portfolios in commodity futures markets by modeling the entire futures price curve with stochastic PDEs, enabling practical solutions for utility maximization.

Contribution

It introduces a finite-dimensional realization of futures price curve models, transforming the infinite-dimensional optimization into a solvable finite-dimensional control problem.

Findings

Finite-dimensional models facilitate portfolio optimization in futures markets.

The control problem's solvability depends on the model's structure.

The approach enables utility maximization in complex futures markets.

Abstract

We consider portfolio optimization in futures markets. We model the entire futures price curve at once as a solution of a stochastic partial differential equation. The agents objective is to maximize her utility from the final wealth when investing in futures contracts. We study a class of futures price curve models which admit a finite-dimensional realization. Using this, we recast the portfolio optimization problem as a finite-dimensional control problem and study its solvability.