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Transition and measurement noise correlation in affine and Gaussian models: the case of oil prices

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  • Carla Gomes Costa De Souza
  • Fernando Antonio Lucena Aiube

Abstract

This paper proposes a new approach for the estimation of affine and Gaussian factor models with the Kalman filter method. It considers the correlation between the innovations of transition and measurement equations. We use crude oil prices in the analysis. When applying this correlation approach in two- and three-factor models, we obtain improvements of error measures between estimated and observed future prices with inexpensive estimation procedures.

Suggested Citation

  • Carla Gomes Costa De Souza & Fernando Antonio Lucena Aiube, 2021. "Transition and measurement noise correlation in affine and Gaussian models: the case of oil prices," International Journal of Financial Markets and Derivatives, Inderscience Enterprises Ltd, vol. 8(1), pages 50-64.
    • Handle: RePEc:ids:ijfmkd:v:8:y:2021:i:1:p:50-64
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