Stochastic Modeling for Bandwidth Commodity Price: A Convenience Yield Model

A network resource-bandwidth is becoming commoditized and bandwidth markets are emerging. For the purposes of managing market risk and investment decision, the stochastic behavior of bandwidth price development must be well modeled to capture main features of bandwidth commodity. Especially, the geographical arbitrage is a challenge for researchers and practitioners. Existing models expressed the geographical arbitrage by market topology related manner making applications complex in practice. This paper presents a convenience yield model describing the arbitrage characteristic and this model is related with market data and not directly with market topology under the assumption that the market is effective. Compared with existing modeling methods, our model has the advantage of expressing simple and convenient application.