《Energy futures prices term structure models with Kalman Filter Estimation》.pdfVIP

A pplie d M athematical Finance 9, 21–43 (2002) Energy futu res prices : term structure models with Kalman lter estimation 1 2 MIHAELA MANOLIU and STATHIS TOMPAIDIS 1Caminus, Zai*Net Analytics, 747 Third Avenue, New York, NY 10017, USA. email: Mihaela.Manoliu@caminus.co m 2MSIS Department and Center fo r Computational Finance, University of Texas at Austin, Austin, TX 78712, USA. email: Stathis.Tompaidis@ Received 10 October 1998 and in revised form 9 November 2000 We present a class of multi-factor stochastic models for energy futures prices, similar to the interest rate futures models recently formulated by Heath. We do not postulate directly the risk-neutral processes followed by futures prices, but de ne energy futures prices in terms of a spot price, not directly observable, driven by several stochastic factors. Our formulation leads to an expression for futures prices which is well suited to the application of Kalman ltering techniques together with maximum likelihood estimation methods . Based on these techniques, we perform an empirical study of a one- and a two-factor model for futures prices for natural gas. Keywords: multi-factor term structure models, Kalman lter estimation 1. Introduction Prices of energy commodities, like electricity and natural gas, have traditionally been regulated, with the nancial risks associated with the costs of running a utility company collectively borne by the users. As the USA and Europe are moving towards a deregulated environment and as new nancial instruments tailored to individual demand pro les are being developed, it is important to introduce models that account for the risks that the sellers and buyers of such energy instruments would face. In this paper, we offer a general multi-factor model designed to account for the obser