On parameter estimation of the Schwartz-Smith short-term/long-term model

The short-term/long-term model proposed by Schwartz and Smith in 2000 is widely used in modeling commodity prices. A key and nontrivial problem in this modeling technique is how to estimate the model parameters. This paper considers the parameter estimation problem based on the maximum likelihood criterion and proposes a method to simplify the task. Two components are contained in the proposed method: one to do with re-parametrization and one to do with separating the parameter set so that one part can be solved directly using least-squares and another part using nonlinear optimization. The effectiveness of the proposed method is demonstrated via numerical tests.