| Article ID | Journal | Published Year | Pages | File Type |
|---|---|---|---|---|
| 5061975 | Economics Letters | 2008 | 5 Pages |
Abstract
This 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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Authors
Martin Flodén,