Finite State Markov-Chain Approximations to Highly Persistent Processes

@inproceedings{Kopecky2009FiniteSM,
  title={Finite State Markov-Chain Approximations to Highly Persistent Processes},
  author={Karen A. Kopecky and R Suen},
  year={2009}
}
The Rouwenhorst method of approximating stationary AR(1) processes has been overlooked by much of the literature despite having many desirable properties unmatched by other methods. In particular, we prove that it can match the conditional and unconditional mean and variance, and the first-order autocorrelation of any stationary AR(1) process. These properties makes the Rouwenhorst method more reliable than others in approximating highly persistent processes and generating accurate model… CONTINUE READING
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