Discretization of Highly-Persistent Correlated AR(1) Shocks
The finite state Markov-Chain approximation method developed by Tauchen (1986) and Tauchen and Hussey (1991) is widely used in economics, finance and econometrics in solving for functional equations where state variables follow an autoregressive process. For highly persistent processes, the method requires a large number of discrete values for the state variables to produce close approximations which leads to an undesirable reduction in computational speed, especially in multidimensional case. This paper proposes an alternative method of discretizing vector autoregressions. The method works well as an approximation and its numerical efficiency applies to a wide range of the parameter space.
|Date of creation:||Sep 2008|
|Date of revision:||Nov 2008|
|Contact details of provider:|| Postal: |
Phone: (514) 848-3900
Fax: (514) 848-4536
Web page: http://economics.concordia.ca
More information through EDIRC
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Terry, Stephen J. & Knotek II, Edward S., 2011.
"Markov-chain approximations of vector autoregressions: Application of general multivariate-normal integration techniques,"
Elsevier, vol. 110(1), pages 4-6, January.
- Edward S. Knotek II & Stephen Terry, 2008. "Markov-chain approximations of vector autoregressions: application of general multivariate-normal integration techniques," Research Working Paper RWP 08-02, Federal Reserve Bank of Kansas City.
- Kopecky, Karen A. & Suen, Richard M. H., 2009.
"Finite State Markov-Chain Approximations to Highly Persistent Processes,"
15122, University Library of Munich, Germany.
- Karen Kopecky & Richard Suen, 2010. "Finite State Markov-chain Approximations to Highly Persistent Processes," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 13(3), pages 701-714, July.
- Kopecky, Karen A. & Suen, Richard M. H., 2009. "Finite State Markov-Chain Approximations to Highly Persistent Processes," MPRA Paper 17201, University Library of Munich, Germany.
- Karen A. Kopecky & Richard M. H. Suen, 2009. "Finite State Markov-Chain Approximations to Highly Persistent Processes," Working Papers 200904, University of California at Riverside, Department of Economics, revised May 2009.
- Floden, Martin, 2007.
"A Note on the Accuracy of Markov-Chain Approximations to Highly Persistent AR(1)-Processes,"
SSE/EFI Working Paper Series in Economics and Finance
656, Stockholm School of Economics.
- Flodén, Martin, 2008. "A note on the accuracy of Markov-chain approximations to highly persistent AR(1) processes," Economics Letters, Elsevier, vol. 99(3), pages 516-520, June.
- 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.
- Dale T. Mortensen & Christopher A. Pissarides, 1993.
"Job Creation and Job Destruction in the Theory of Unemployment,"
CEP Discussion Papers
dp0110, Centre for Economic Performance, LSE.
- Mortensen, Dale T & Pissarides, Christopher A, 1994. "Job Creation and Job Destruction in the Theory of Unemployment," Review of Economic Studies, Wiley Blackwell, vol. 61(3), pages 397-415, July.
- Tauchen, George, 1986. "Finite state markov-chain approximations to univariate and vector autoregressions," Economics Letters, Elsevier, vol. 20(2), pages 177-181.
- Lu Zhang, 2005. "The Value Premium," Journal of Finance, American Finance Association, vol. 60(1), pages 67-103, 02.
When requesting a correction, please mention this item's handle: RePEc:crd:wpaper:08012. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Economics Department)
If references are entirely missing, you can add them using this form.