Solving Portfolio Problems with the Smolyak-Parameterized Expectations Algorithm
Ángel Gavilán () and
Juan Rojas ()
Additional contact information
Ángel Gavilán: Banco de España
No 838, Working Papers from Banco de España, Working Papers Homepage
We propose a new numerical method to solve stochastic models that combines the parameterized expectations (PEA) and the Smolyak algorithms. This method is especially convenient to address problems with occasionally binding constraints (a feature inherited from PEA) and/or a large number of state variables (a feature inherited from Smolyak), i.e. DSGE models that incorporate portfolio problems and incomplete markets. We describe the proposed Smolyak-PEA algorithm in the context of a one-country stochastic neoclassical growth model and compare its accuracy with that of a standard PEA collocation algorithm. Despite estimating fewer parameters, the former is able to reach the high accuracy levels of the latter. We further illustrate the working of this algorithm in a two-country neoclassical model with incomplete markets and portfolio choice. Again, the Smolyak-PEA algorithm approximates the solution of the problem with a high degree of accuracy. Finally, we show how this algorithm can efficiently incorporate both occasionally binding constraints and a partial information approach.
Keywords: Portfolio Choice; Dynamic Macroeconomics; Computational Methods (search for similar items in EconPapers)
JEL-codes: E2 C68 (search for similar items in EconPapers)
Pages: 30 pages
New Economics Papers: this item is included in nep-cba, nep-cmp, nep-dge, nep-mac and nep-ore
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6) Track citations by RSS feed
Downloads: (external link)
http://www.bde.es/f/webbde/SES/Secciones/Publicaci ... o/08/Fic/dt0838e.pdf First version, February 2009 (application/pdf)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:bde:wpaper:0838
Access Statistics for this paper
More papers in Working Papers from Banco de España, Working Papers Homepage Contact information at EDIRC.
Bibliographic data for series maintained by María Beiro. Electronic Dissemination of Information Unit. Research Department. Banco de España ().