Stochastic Modeling for Network Bandwidth Commodities

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 mean-reversion, spikes and the geographical arbitrage. This paper presents a three-regime switching model that incorporates the three main features. Compared with existing modeling methods, our model is concise in expression and practicable because our model is only related with market data and not directly related with market topology under the assumption that the market is effective. Closed-form formulas of European option prices are also obtained under the model.