Solving Incomplete Markets Models by Derivative Aggregation

Tobias Grasl
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Tobias Grasl: Department of Economics, Mathematics & Statistics, Birkbeck

No 1302, Birkbeck Working Papers in Economics and Finance from Birkbeck, Department of Economics, Mathematics & Statistics

Abstract: This article presents a novel computational approach to solving models with both uninsurable idiosyncratic and aggregate risk that uses projection methods, simulation and perturbation. The approach is shown to be both as efficient and as accurate as existing methods on a model based on Krusell and Smith (1998), for which prior solutions exist. The approach has the advantage of extending straightforwardly, and with reasonable computational cost, to models with a greater range of diversity between agents, which is demonstrated by solving both a model with heterogeneity in discount-rates and a lifecycle model with incomplete markets.

Keywords: Idiosyncratic Risk; Business Cycles; Numerical Methods (search for similar items in EconPapers)
JEL-codes: C63 E21 E32 (search for similar items in EconPapers)
Date: 2013-02
New Economics Papers: this item is included in nep-cmp and nep-dge
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https://eprints.bbk.ac.uk/id/eprint/6531 First version, 2013 (application/pdf)

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