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Accuracy of stochastic perturbation methods: The case of asset pricing models

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  • Collard, Fabrice
  • Juillard, Michel
Abstract
This paper investigates the accuracy of a perturbation method in approximating the solution to stochastic equilibrium models under rational expectations. As a benchmark model, we use a version of asset pricing models proposed by Burnside [1988] which admits a closed-form solution while not making the assumptions of certainty equivalence. We then check the accuracy of perturbation methods -extended to a stochastic environment- against the closed form solution. Second an especially fourth order expansions are then found to be more efficient than standard linear approximation, as they are able to account for higher order moments of the distribution.
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  • Collard, Fabrice & Juillard, Michel, 2001. "Accuracy of stochastic perturbation methods: The case of asset pricing models," Journal of Economic Dynamics and Control, Elsevier, vol. 25(6-7), pages 979-999, June.
    • Handle: RePEc:eee:dyncon:v:25:y:2001:i:6-7:p:979-999
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    5. Rietz, Thomas A., 1988. "The equity risk premium a solution," Journal of Monetary Economics, Elsevier, vol. 22(1), pages 117-131, July.
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    More about this item

    JEL classification:

    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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