Accuracy of stochastic perturbuation methods: the case of asset pricing models
AbstractThis paper investigates the accuracy of a perturbation method in approximating the solution to stochastic equilibrium models under rational expectations. As a benchmark model, we use a version of asset pricing models proposed by Burnside  which admits a closed-form solution while not making the assumptions of certainty equivalence. We then check the accuracy of perturbation methods -extended to a stochastic environment- against the closed form solution. Second an especially fourth order expansions are then found to be more efficient than standard linear approximation, as they are able to account for higher order moments of the distribution.
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Bibliographic InfoPaper provided by CEPREMAP in its series CEPREMAP Working Papers (Couverture Orange) with number 9922.
Length: 20 pages
Date of creation: 1999
Date of revision:
Other versions of this item:
- Collard, Fabrice & Juillard, Michel, 2001. "Accuracy of stochastic perturbation methods: The case of asset pricing models," Journal of Economic Dynamics and Control, Elsevier, vol. 25(6-7), pages 979-999, June.
- C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
This paper has been announced in the following NEP Reports:
- NEP-ALL-2000-06-29 (All new papers)
- NEP-FIN-2000-06-29 (Finance)
- NEP-FMK-2000-06-29 (Financial Markets)
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