A note on the accuracy of Markov-chain approximations to highly persistent AR(1)-processes

Arbeitspapier

This note examines the accuracy of methods that are commonly used to approximate AR(1)-processes with discrete Markov chains. The quadrature-based method suggested by Tauchen and Hussey (1991) generates excellent approximations with a small number of nodes when the autocorrelation is low or modest. This method however has problems when the autocorrelation is high, as it typically is found to be in recent empirical studies of income processes. I suggest an alternative weighting function for the Tauchen-Hussey method, and I also note that the older method suggested by Tauchen (1986) is relatively robust to high autocorrelation.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: SSE/EFI Working Paper Series in Economics and Finance ; No. 656

Classification and Topics

• Classification: Wirtschaft ; Mathematical Methods; Programming Models; Mathematical and Simulation Modeling: General
• Subject: numerical methods ; income processes ; autoregressive process ; Markovscher Prozess ; Numerisches Verfahren ; VAR-Modell ; Theorie

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Flodén, Martin
• Event: Veröffentlichung
• (who): Stockholm School of Economics, The Economic Research Institute (EFI)
• (where): Stockholm
• (when): 2007

Further information

• Handle: http://hdl.handle.net/10419/56137
• Last update: 10.03.2025, 11:42 AM CET