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Alternative methods of solving state-dependent pricing models

  • Edward S. Knotek
  • Stephen J. Terry

We use simulation-based techniques to compare and contrast two methods for solving state-dependent pricing models: discretization, which solves and simulates the model on a grid; and collocation, which relies on Chebyshev polynomials. While both methods produce qualitatively similar results, statistically significant quantitative differences do arise. We present evidence favoring discretization over collocation in this context, given a lack of robustness in the latter.

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Paper provided by Federal Reserve Bank of Kansas City in its series Research Working Paper with number RWP 08-10.

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Date of creation: 2008
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Handle: RePEc:fip:fedkrw:rwp08-10
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