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On the Parameter Estimation in the Schwartz-Smiths Two-Factor Model

Karol Binkowski, Peilun He, Nino Kordzakhia and Pavel Shevchenko

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Abstract: The two unobservable state variables representing the short and long term factors introduced by Schwartz and Smith in [16] for risk-neutral pricing of futures contracts are modelled as two correlated Ornstein-Uhlenbeck processes. The Kalman Filter (KF) method has been implemented to estimate the short and long term factors jointly with un- known model parameters. The parameter identification problem arising within the likelihood function in the KF has been addressed by introduc- ing an additional constraint. The obtained model parameter estimates are the conditional Maximum Likelihood Estimators (MLEs) evaluated within the KF. Consistency of the conditional MLEs is studied. The methodology has been tested on simulated data.

Date: 2021-08
New Economics Papers: this item is included in nep-ecm, nep-ets and nep-isf
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Published in Binkowski K., He P., Kordzakhia N., Shevchenko P. (2019) On the Parameter Estimation in the Schwartz-Smiths Two-Factor Model. Communications in Computer and Information Science, vol 1150

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