A note on the accuracy of Markov-chain approximations to highly persistent AR(1) processes
AbstractThis note examines the accuracy of methods that approximate AR(1) processes with discrete Markov chains. Tauchen and Hussey's [Tauchen, G., Hussey, R., 1991. Quadrature-based methods for obtaining approximate solutions to nonlinear asset pricing models. Econometrica 59, 371-396] method has problems under high autocorrelation. I suggest an alternative weighting function, and note that Tauchen's [Tauchen, G., 1986. Finite state Markov-chain approximations to univariate and vector autoregressions. Economics Letters 20, 177-181] method is relatively robust.
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Bibliographic InfoArticle provided by Elsevier in its journal Economics Letters.
Volume (Year): 99 (2008)
Issue (Month): 3 (June)
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Other versions of this item:
- Floden, Martin, 2007. "A Note on the Accuracy of Markov-Chain Approximations to Highly Persistent AR(1)-Processes," Working Paper Series in Economics and Finance 656, Stockholm School of Economics.
- C60 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - General
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