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The Exact Discrete Model Of A Third-Order System Of Linear Stochastic Differential Equations With Observable Stochastic Trends

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  • Simos, Theodore

Abstract

The objective of this paper is to develop closed-form formulae for the exact discretization of a third-order system of stochastic differential equations, with fixed initial conditions, driven by observable stochastic trends and white noise innovations. The model provides a realistic alternative to first- and second-order differential equation specifications of the time lag distribution, forming the basis of a testing and estimation procedure. The exact discrete models, derived under two sampling schemes with either stock or flow variables, are put into a system error correction form that preserves the information of the underlying continuous time model regarding the order of integration and the dimension of cointegration space.

Suggested Citation

  • Simos, Theodore, 2009. "The Exact Discrete Model Of A Third-Order System Of Linear Stochastic Differential Equations With Observable Stochastic Trends," Macroeconomic Dynamics, Cambridge University Press, vol. 13(5), pages 656-672, November.
    • Handle: RePEc:cup:macdyn:v:13:y:2009:i:05:p:656-672_08
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