On correlated measurement errors in the Schwartz–Smith two-factor model
The Schwartz–Smith two-factor model is commonly used for pricing of derivatives in commodity markets. For estimating and forecasting the term structures of futures prices, the logarithm of commodity spot price is represented as the sum of short- and long-term factors being the unobservable state var...
| Main Authors: | , , , |
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| Format: | Article |
| Language: | English |
| Published: |
De Gruyter
2022-05-01
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| Series: | Dependence Modeling |
| Subjects: | |
| Online Access: | https://doi.org/10.1515/demo-2022-0106 |
| _version_ | 1811203681596473344 |
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| author | Han Jun S. Kordzakhia Nino Shevchenko Pavel V. Trück Stefan |
| author_facet | Han Jun S. Kordzakhia Nino Shevchenko Pavel V. Trück Stefan |
| author_sort | Han Jun S. |
| collection | DOAJ |
| description | The Schwartz–Smith two-factor model is commonly used for pricing of derivatives in commodity markets. For estimating and forecasting the term structures of futures prices, the logarithm of commodity spot price is represented as the sum of short- and long-term factors being the unobservable state variables. The futures prices derived as functions of the spot price lead to the simultaneous set of measurement equations, which is used for joint estimation of unobservable state variables and the model parameters through a filtering procedure. We propose a modified model where the error terms in the measurement equations are assumed to be serially correlated. In addition, for comparative analysis, the modelling of the logarithmic returns of futures prices is also considered. Out-of-sample prediction performances of two proposed models were illustrated using European Unit Allowances (EUA) futures prices from January 2017 to April 2021. Historically, this period corresponds to the second half of Phase III, and the beginning of Phase IV of the European Union Emission Trading System (EU-ETS). |
| first_indexed | 2024-04-12T02:59:43Z |
| format | Article |
| id | doaj.art-a349b56c43cb4ee7913d12e21f83f743 |
| institution | Directory Open Access Journal |
| issn | 2300-2298 |
| language | English |
| last_indexed | 2024-04-12T02:59:43Z |
| publishDate | 2022-05-01 |
| publisher | De Gruyter |
| record_format | Article |
| series | Dependence Modeling |
| spelling | doaj.art-a349b56c43cb4ee7913d12e21f83f7432022-12-22T03:50:42ZengDe GruyterDependence Modeling2300-22982022-05-0110110812210.1515/demo-2022-0106On correlated measurement errors in the Schwartz–Smith two-factor modelHan Jun S.0Kordzakhia Nino1Shevchenko Pavel V.2Trück Stefan3Department of Mathematics and Statistics, Macquarie University, Macquarie Park NSW 2109, AustraliaDepartment of Mathematics and Statistics, Macquarie University, Macquarie Park NSW 2109, AustraliaDepartment of Actuarial Studies and Business Analytics, Macquarie University, Macquarie Park NSW 2109, AustraliaDepartment of Actuarial Studies and Business Analytics, Macquarie University, Macquarie Park NSW 2109, AustraliaThe Schwartz–Smith two-factor model is commonly used for pricing of derivatives in commodity markets. For estimating and forecasting the term structures of futures prices, the logarithm of commodity spot price is represented as the sum of short- and long-term factors being the unobservable state variables. The futures prices derived as functions of the spot price lead to the simultaneous set of measurement equations, which is used for joint estimation of unobservable state variables and the model parameters through a filtering procedure. We propose a modified model where the error terms in the measurement equations are assumed to be serially correlated. In addition, for comparative analysis, the modelling of the logarithmic returns of futures prices is also considered. Out-of-sample prediction performances of two proposed models were illustrated using European Unit Allowances (EUA) futures prices from January 2017 to April 2021. Historically, this period corresponds to the second half of Phase III, and the beginning of Phase IV of the European Union Emission Trading System (EU-ETS).https://doi.org/10.1515/demo-2022-0106pricingfuturescommodityco2 emission allowanceskalman filtercorrelationmaximum likelihood estimationlinear state-space model62p0591b70 |
| spellingShingle | Han Jun S. Kordzakhia Nino Shevchenko Pavel V. Trück Stefan On correlated measurement errors in the Schwartz–Smith two-factor model Dependence Modeling pricing futures commodity co2 emission allowances kalman filter correlation maximum likelihood estimation linear state-space model 62p05 91b70 |
| title | On correlated measurement errors in the Schwartz–Smith two-factor model |
| title_full | On correlated measurement errors in the Schwartz–Smith two-factor model |
| title_fullStr | On correlated measurement errors in the Schwartz–Smith two-factor model |
| title_full_unstemmed | On correlated measurement errors in the Schwartz–Smith two-factor model |
| title_short | On correlated measurement errors in the Schwartz–Smith two-factor model |
| title_sort | on correlated measurement errors in the schwartz smith two factor model |
| topic | pricing futures commodity co2 emission allowances kalman filter correlation maximum likelihood estimation linear state-space model 62p05 91b70 |
| url | https://doi.org/10.1515/demo-2022-0106 |
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