Alternative methods of solving state-dependent pricing models

Edward Knotek and Stephen Terry

No RWP 08-10, Research Working Paper from Federal Reserve Bank of Kansas City

Abstract: We use simulation-based techniques to compare and contrast two methods for solving state-dependent pricing models: discretization, which solves and simulates the model on a grid; and collocation, which relies on Chebyshev polynomials. While both methods produce qualitatively similar results, statistically significant quantitative differences do arise. We present evidence favoring discretization over collocation in this context, given a lack of robustness in the latter.

Date: 2008
New Economics Papers: this item is included in nep-cba, nep-cmp and nep-dge
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