Pricing energy contracts under regime switching time-changed Levy Processes

The failures of the popular Black-Scholes-Merton (BSM) model led to an interest in new, robust models which could more accurately model the behavior of historical prices. We consider one such model, the regime switching time-changed Levy process, which builds upon the BSM model by incorporating jumps through a random clock, as well as randomly varying parameters according to a continuous-time Markov chain. We develop the characteristic function as well as two methods for pricing European call options. Finally, we estimate the parameters of the model by incorporating historic energy data and option quotes using a variety of methods.