Finite state markov-chain approximations to univariate and vector autoregressions

doi:10.1016/0165-1765(86)90168-0

Economics Letters

Volume 20, Issue 2, 1986, Pages 177-181

https://doi.org/10.1016/0165-1765(86)90168-0 Get rights and content

Abstract

The paper develops a procedure for finding a discrete-valued Markov chain whose sample paths approximate well those of a vector autoregression. The procedure has applications in those areas of economics, finance, and econometrics where approximate solutions to integral equations are required.

References (9)

W. Brock
Asset prices in a production economy
J.B. Donaldson et al.
Comparative dynamics of an intertemporal asset pricing model
Review of Economic Studies
(1984)
Lars P. Hansen
Generalized method of moments estimators
Econometrica
(1982)
R.E. Lucas
Asset prices in an exchange economy
Econometrica
(1978)

There are more references available in the full text version of this article.

Cited by (827)

Sovereign debt and credit default swaps
2024, Journal of International Economics
How do credit default swaps (CDS) affect sovereign debt markets? We analyze how liquidity, exposure to default risk, and regulation affect the answer to this question using a sovereign debt model where investors trade bonds and CDS over the counter via directed search. Restricting portfolios can improve bond prices and bond-market activity, but the net effect depends on relative frictions in bond and CDS markets, the exposure of investors, and how the sovereign responds to the policy. Our novel identification strategy exploits confidential microdata to quantify trading frictions and the exposure distribution. The calibrated model generates realistic CDS-bond basis deviations, bid–ask spreads, and CDS volumes and positions. Our baseline specification predicts trading frictions and an inability to short sell bonds significantly improves sovereign debt prices, but policies that restrict CDS trading have small effects.
Bequests and wealth inequality in Japan
2024, Journal of the Japanese and International Economies
This study explores the effect of bequests on wealth inequality in Japan. We construct a heterogeneous life cycle model incorporating the transmission of physical and human capital from parents to their children, particularly bequests transfer and the positive correlation of productivity between them. Our model generates more realistic wealth dispersion in Japan compared to a canonical life cycle model which does not include such capital links. The bequest motives, that is, the desire to leave bequests, increase savings in old age. However, the expectation of receiving bequests in the future leads to a decline in savings when young. Moreover, bequests increase lifetime income, inducing wealth accumulation for achieving more consumption over the life cycle.
Uncertainty dynamics in energy planning models: An autoregressive and Markov chain modeling approach
2024, Computers and Industrial Engineering
This paper deals with the modeling of stochastic processes in long-term multi-stage energy planning problems when limited information is available about the distributions of such processes. Starting from simple estimates of variation intervals for uncertain parameters, such as energy demands and costs, we model the temporal correlation of these parameters through carefully constructed autoregressive (AR) models that respect the intervals defined in each period. We introduce a coefficient for “zigzag” effects in the evolution of uncertain processes, which controls the correlation across periods and also the likelihood of extreme scenarios. To preserve the convexity of the stochastic problem, we discretize the AR models associated with the cost parameters involved in the objective function by Markov chains. The resulting formulation is then solved using a Stochastic Dual Dynamic Programming (SDDP) algorithm available in the literature that handles finite-state Markov chains. Our numerical experiments, carried out on the Swiss energy system, show a very desirable adaptation strategy of investment decisions to uncertainty scenarios, a behavior that is not observed when the temporal correlation is ignored. Moreover, the solutions lead to better out-of-sample cost performances, especially on extreme scenario realizations, than the non-correlated ones which usually result in overcapacities to protect against high, but unlikely, parameter variations over time.
Life-cycle wealth accumulation and consumption insurance
2024, Journal of Macroeconomics
Households appear to smooth consumption in the face of income shocks much more than implied by life-cycle versions of the standard incomplete market model under reference calibrations. In the current paper we explore in detail the role played by the life-cycle profile of wealth accumulation. We show that a standard model parameterized to match the latter can rationalize between 81 and 100 percent of the consumption insurance against permanent earnings shocks empirically estimated by Blundell, Pistaferri and Preston (2008), depending on the tightness of the borrowing limit.
Worker mobility and UI extensions
2024, European Economic Review
We develop an equilibrium search model with a labor force participation decision, job-to-job transitions, and endogenous separations. The calibrated model perfectly matches the observed labor market flows in US data. We use the model to simulate the effects of an extension of unemployment insurance benefits to 99 weeks. The reform leads to a decrease in employment, an increase in the labor force participation and unemployment rate, while it leaves labor productivity roughly constant. Using a model-based decomposition, as well as comparisons with alternative simplified models, we show that modeling workers’ participation decisions, job-to-job transitions, and endogenous separations together is crucial for a complete and accurate analysis of UI reforms.
Can passive monetary policy decrease the debt burden?
2024, Journal of Economic Dynamics and Control
Large expansionary fiscal measures are often implemented with monetary accommodation during an economic crisis. When a government is highly indebted, and the timing of switching to the conventional regime $M$ (passive fiscal/active monetary policies) is uncertain, a government spending increase in regime $F$ (active fiscal/passive monetary policies) increases government debt. Such regime uncertainty dampens inflation and debt revaluation effects. Also, as regime uncertainty generates a smaller real interest rate decline, debt servicing costs fall less, and tax revenues increase less, than in the fixed regime $F$ . These factors contribute to reversing the debt decline for a spending increase in the fixed regime $F$ . The result holds under adverse supply shocks and potentially higher capital taxes, relevant factors in the post-COVID U.S. economy.

View all citing articles on Scopus

View full text

Finite state markov-chain approximations to univariate and vector autoregressions

Abstract

Asset prices in a production economy

Comparative dynamics of an intertemporal asset pricing model

Review of Economic Studies

Generalized method of moments estimators

Econometrica

Asset prices in an exchange economy

Econometrica