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Markov-chain approximations of vector autoregressions: Application of general multivariate-normal integration techniques

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Author Info

  • Terry, Stephen J.
  • Knotek II, Edward S.

Abstract

Discrete Markov chains are helpful for approximating vector autoregressive processes in computational work. We relax G. Tauchen (1986) [Finite state Markov-chain approximations to univariate and vector autoregressions. Economics Letters 20, 177-181] in practice using multivariate-normal integration techniques to allow for arbitrary positive-semidefinite covariance structures. Examples are provided for non-diagonal and singular non-diagonal error covariances.

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File URL: http://www.sciencedirect.com/science/article/B6V84-514R640-1/2/efe204df33ab60f0c80b96a9bb46f3f6
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Bibliographic Info

Article provided by Elsevier in its journal Economics Letters.

Volume (Year): 110 (2011)
Issue (Month): 1 (January)
Pages: 4-6

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Handle: RePEc:eee:ecolet:v:110:y:2011:i:1:p:4-6

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Web page: http://www.elsevier.com/locate/ecolet

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Keywords: Markov approximation Non-diagonal Singular covariance;

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References

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  1. Tauchen, George, 1986. "Finite state markov-chain approximations to univariate and vector autoregressions," Economics Letters, Elsevier, vol. 20(2), pages 177-181.
  2. Tauchen, George & Hussey, Robert, 1991. "Quadrature-Based Methods for Obtaining Approximate Solutions to Nonlinear Asset Pricing Models," Econometrica, Econometric Society, vol. 59(2), pages 371-96, March.
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Citations

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Cited by:
  1. Lkhagvasuren, Damba & Galindev, Ragchaasuren, 2008. "Discretization of highly persistent correlated AR(1) shocks," MPRA Paper 22523, University Library of Munich, Germany.
  2. Juan Carlos Hatchondo & Leonardo Martinez & Juan M. Sanchez, 2011. "Mortgage defaults," Working Paper 11-05, Federal Reserve Bank of Richmond.
  3. Pedro Gete and Paolo Porchia, 2011. "Fertility and Consumption when Having a Child is a Risky Investment," Working Papers gueconwpa~11-11-03, Georgetown University, Department of Economics.
  4. Gianni De Nicoló & Andrea Gamba & Marcella Lucchetta, 2012. "Capital Regulation, Liquidity Requirements and Taxation in a Dynamic Model of Banking," IMF Working Papers 12/72, International Monetary Fund.
  5. : Andrea Gamba & : Alexander J. Triantis, 2013. "Corporate Risk Management: Integrating Liquidity, Hedging and Operating Policies," Working Papers wpn13-07, Warwick Business School, Finance Group.
  6. Gospodinov, Nikolay & Lkhagvasuren, Damba, 2011. "A new method for approximating vector autoregressive processes by finite-state Markov chains," MPRA Paper 33827, University Library of Munich, Germany.
  7. Nikolay Gospodinov & Damba Lkhagvasuren, 2011. "A Moment-Matching Method for Approximating Vector Autoregressive Processes by Finite-State Markov Chains," Working Papers 11005, Concordia University, Department of Economics, revised 16 Dec 2011.
  8. Edward S. Knotek II & Stephen Terry, 2008. "Alternative methods of solving state-dependent pricing models," Research Working Paper RWP 08-10, Federal Reserve Bank of Kansas City.

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