Solving Portfolio Problems with the Smolyak-Parameterized Expectations Algorithm

Ángel Gavilán () and Juan Rojas
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Ángel Gavilán: Banco de España

No 838, Working Papers from Banco de España

Abstract: 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: C68 E2 (search for similar items in EconPapers)
Pages: 30 pages
Date: 2009-02
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 (7)

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Persistent link: https://EconPapers.repec.org/RePEc:bde:wpaper:0838

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