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

TL;DR

This paper develops a framework for optimal dynamic trading of futures under a multiscale Ornstein-Uhlenbeck model, deriving closed-form prices and strategies through utility maximization and HJB equations.

Contribution

It introduces a novel multiscale central tendency Ornstein-Uhlenbeck model and derives explicit optimal trading strategies for futures under this framework.

Findings

Closed-form no-arbitrage futures prices derived.

Optimal trading strategies depend on model parameters and risk premia.

Numerical examples illustrate optimal positions and wealth evolution.

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.