Investment Under Risk with Discrete and Continuous Assets: Solution and Estimation

Tinbergen Institute Discussion Paper 09-054/2

32 Pages Posted: 19 Jun 2009

See all articles by Chris Elbers

Chris Elbers

Vrije Universiteit Amsterdam, School of Business and Economics; Tinbergen Institute - Tinbergen Institute Amsterdam (TIA)

Jan Willem Gunning

Vrije Universiteit Amsterdam, School of Business and Economics; Tinbergen Institute; Tinbergen Institute - Tinbergen Institute Amsterdam (TIA)

Melinda Vigh

VU University Amsterdam

Date Written: June 19, 2009

Abstract

This paper considers a general class of stochastic dynamic choice models with discrete and continuous decision variables. This class contains a variety of models that are useful for modeling intertemporal household decisions under risk. Our examples are drawn from the field of development economics. We formalize this class as a dynamic programming problem, then propose a solution method that relies on value function iteration. Finally, in an example we show how our algorithm can be applied to solve and estimate a dynamic model with discrete and continuous controls.

Keywords: value function iteration, mixed continuous/discrete controls, stochastic dynamic choice model

JEL Classification: C61, C63, C51, E12, G11, Q12

Suggested Citation

Elbers, Chris and Gunning, Jan Willem and Vigh, Melinda, Investment Under Risk with Discrete and Continuous Assets: Solution and Estimation (June 19, 2009). Tinbergen Institute Discussion Paper 09-054/2. Available at SSRN: https://ssrn.com/abstract=1422449 or http://dx.doi.org/10.2139/ssrn.1422449

Chris Elbers (Contact Author)

Vrije Universiteit Amsterdam, School of Business and Economics ( email )

De Boelelaan 1105
Amsterdam, 1081HV
Netherlands

Tinbergen Institute - Tinbergen Institute Amsterdam (TIA) ( email )

Gustav Mahlerplein 117
Amsterdam, 1082 MS
Netherlands

Jan Willem Gunning

Vrije Universiteit Amsterdam, School of Business and Economics ( email )

De Boelelaan 1105
Amsterdam, 1081HV
Netherlands
+ 310 20 444 6141 (Phone)
+ 310 20 444 6004 (Fax)

Tinbergen Institute ( email )

Burg. Oudlaan 50
Rotterdam, 3062 PA
Netherlands

Tinbergen Institute - Tinbergen Institute Amsterdam (TIA) ( email )

Gustav Mahlerplein 117
Amsterdam, 1082 MS
Netherlands

Melinda Vigh

VU University Amsterdam ( email )

De Boelelaan 1105
Amsterdam, ND North Holland 1081 HV
Netherlands

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