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A hidden markov multi-asset price model

Date

2007-01

Authors

Elliott, Robert J., author
Tao, L., author
Miao, Hong, author
Canadian Applied Mathematics Quarterly, publisher

Journal Title

Journal ISSN

Volume Title

Abstract

Prices for some real world tradable assets, for instance natural gas and oil, are correlated, and the price dynamics for those assets are different in different economic environments. In this paper we extend the mean reverting model to multi-assets and model correlation between prices. Our model also allows the means and the mean reverting factors to switch between different regimes by including a Hidden Markov chain which models the different economic environments, or "states of the world." We then obtain approximate estimates for the parameters by applying filters and the EM algorithm. Approximate derivative prices are also given.

Description

Includes bibliographical references (pages 25-26).
Published as: Canadian Applied Mathematics Quarterly, vol.15, no.1, pp.23-51, Spring 2007, available at http://www.math.ualberta.ca/ami/CAMQ/pdf_files/vol_15/15_1/15_1c.pdf.

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Subject

mean reverting
commodity markets
regime switching
hidden Markov Chain
EM algorithm

Citation

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