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date: 23 August 2019

Abstract and Keywords

This article demonstrates the utility of the Bayesian approach in forecasting and risk modelling regarding speculative trading strategies in financial futures markets. It first provides an overview of subjective expectations that are motivated as fair prices of futures contracts before discussing the futures markets and a portfolio mean-variance efficiency generalization. In particular, it considers the critical role of hedging to ensue attractive risk-adjusted performance. It also describes general Bayesian dynamic models and specific Bayesian dynamic linear models for assessing risk models in terms of their hedging effectiveness in the context of the risk-adjusted performance of trading strategies. The article showcases applied Bayesian thinking in the context of financial investment management, highlighting the corresponding concepts of betting and investing, prices and expectations, and coherence and arbitrage-free pricing in futures markets over the period 1990–2008.

Keywords: speculative trading, financial futures markets, risk modelling, hedging, investment management, arbitrage-free pricing, subjective expectations, futures contracts, dynamic linear models, forecasting

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