THE EXACT DISCRETE MODEL OF A THIRD-ORDER SYSTEM OF LINEAR STOCHASTIC DIFFERENTIAL EQUATIONS WITH OBSERVABLE STOCHASTIC TRENDS

Theodore Simos ()

Macroeconomic Dynamics, 2009, vol. 13, issue 5, 656-672

Abstract: The objective of this paper is to develop closed-form formulae for the exact discretization of a third-order system of stochastic differential equations, with fixed initial conditions, driven by observable stochastic trends and white noise innovations. The model provides a realistic alternative to first- and second-order differential equation specifications of the time lag distribution, forming the basis of a testing and estimation procedure. The exact discrete models, derived under two sampling schemes with either stock or flow variables, are put into a system error correction form that preserves the information of the underlying continuous time model regarding the order of integration and the dimension of cointegration space.

Date: 2009
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Persistent link: https://EconPapers.repec.org/RePEc:cup:macdyn:v:13:y:2009:i:05:p:656-672_08

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