Discretization of highly persistent correlated AR(1) shocks

@inproceedings{Lkhagvasuren2008DiscretizationOH,
  title={Discretization of highly persistent correlated AR(1) shocks},
  author={Damba Lkhagvasuren and Ragchaasuren Galindev},
  year={2008}
}
The finite state Markov-Chain approximation method developed by Tauchen (1986) and Tauchen and Hussey (1991) is widely used in economics, finance and econometrics in solving for functional equations where state variables follow an autoregressive process. For highly persistent processes, the method requires a large number of discrete values for the state variables to produce close approximations which leads to an undesirable reduction in computational speed, especially in a multidimensional case… CONTINUE READING
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