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Stochastic Control for Dynamic Managed Futures Portfolios

Article arXiv papers · Author: Tim Leung et al.
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Summary

This document describes a stochastic control framework for choosing trades in commodity futures over a finite investment horizon. It builds on the Schwartz 1997 model, which represents commodity prices using a stochastic convenience yield, and formulates utility maximization for an investor trading either a single-maturity futures contract or multiple contracts. The method analyzes the associated Hamilton-Jacobi-Bellman equation to derive optimal dynamic trading strategies in closed form.

The authors provide numerical examples and illustrate the strategies with WTI crude oil futures data. The description establishes that the framework covers both single-contract and multi-contract settings, but gives no details about the utility specification, model assumptions, numerical findings, or trading performance. Its evidence is therefore illustrative rather than enough to assess profitability or robustness. The approach is model-based and finite-horizon; the document does not say how results would change with transaction costs, estimation error, or market conditions outside the examples.

Key ideas

  • The framework models commodity prices using a stochastic convenience yield.
  • It formulates finite-horizon utility maximization for trading one or multiple futures contracts.
  • Analysis of the Hamilton-Jacobi-Bellman equation yields closed-form dynamic strategies.
  • Numerical examples use WTI crude oil futures to illustrate the approach.

Tags

FuturesCommoditiesPortfolio constructionDerivatives pricing
Full text
# A Stochastic Control Approach to Managed Futures Portfolios


# A Stochastic Control Approach to Managed Futures Portfolios









We study a stochastic control approach to managed futures portfolios. Building on the Schwartz 97 stochastic convenience yield model for commodity prices, we formulate a utility maximization problem for dynamically trading a single-maturity futures or multiple futures contracts over a finite horizon. By analyzing the associated Hamilton-Jacobi-Bellman (HJB) equation, we solve the investor's utility maximization problem explicitly and derive the optimal dynamic trading strategies in closed form. We provide numerical examples and illustrate the optimal trading strategies using WTI crude oil futures data.

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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.