N-factor model covariance:
Calculate the covariance matrix of state variables for a given N-factor model parameters and discrete time step.
cov_func(parameters, dt)
parameters |
a named vector of parameters of an N-factor model. Function |
dt |
a discrete time step |
The primary purpose of the model_covariance function is to be called within other functions of the NFCP package. The covariance of an N-factor model is given by:
A matrix object with dimensions \(N \times N\), where N is the number of factors of the specified N-factor model.
Schwartz, E. S., and J. E. Smith, (2000). Short-Term Variations and Long-Term Dynamics in Commodity Prices. Manage. Sci., 46, 893-911.
Cortazar, G., and L. Naranjo, (2006). An N-factor Gaussian model of oil futures prices. Journal of Futures Markets: Futures, Options, and Other Derivative Products, 26(3), 243-268.
#Calculate the covariance matrix of a two-factor model over one discrete (weekly) time step: SS_oil.covariance <- cov_func(SS_oil$two_factor, SS_oil$dt)
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