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Quadrature-Based Methods for Obtaining Approximate Solutions to Nonlinear Asset Pricing Models

George Tauchen and Robert Hussey
Econometrica
Vol. 59, No. 2 (Mar., 1991), pp. 371-396
Published by: The Econometric Society
DOI: 10.2307/2938261
Stable URL: http://www.jstor.org/stable/2938261
Page Count: 26
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Quadrature-Based Methods for Obtaining Approximate Solutions to Nonlinear Asset Pricing Models
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Abstract

The paper develops a discrete state space solution method for a class of nonlinear rational expectations models. The method works by using numerical quadrature rules to approximate the integral operators that arise in stochastic intertemporal models. The method is particularly useful for approximating asset pricing models and has potential applications in other problems as well. An empirical application uses the method to study the relationship between the risk premium and the conditional variability of the equity return under an ARCH endowment process.

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