Abstract
We consider the Schwartz 97 two and three factor models, which have been considered as benchmarks for pricing commodity derivatives in the last two decades. In order to take account of sudden regime shifts in commodity prices, we superimpose a regime shifting structure onto this framework. Using methodology developed by Duan et. al. (2002) and Swishchuk (2008) we are able to obtain within the resulting models closed form expressions for the values of European call options written on the commodity. Using data from the Gold, Copper and Corn markets, we find that the added regime shifting feature leads to a significant improvement in fit.
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
