An Efficient Method of Computing Higher Order Bond Price Perturbation Approximations

38 Pages Posted: 4 May 2010 Last revised: 11 May 2010

Martin M. Andreasen

University of Aarhus; CREATES, Aarhus University

Pawel Zabczyk

CCBS, Bank of England

Multiple version iconThere are 2 versions of this paper

Date Written: May 10, 2010

Abstract

This paper develops a fast method of computing arbitrary order perturbation approximations to bond prices in DSGE models. The procedure is implemented to third order where it can shorten the approximation process by more than one hundred times. In a consumption-based endowment model with habits, it is further shown that a third order perturbation solution is more accurate than the log-normal method and a procedure using consol bonds. In addition, we present MATLAB codes that implement the suggested method to third order.

Keywords: Perturbation method, DSGE models, Habit model, Higher order approximation

JEL Classification: C68, E

Suggested Citation

Andreasen, Martin M. and Zabczyk, Pawel, An Efficient Method of Computing Higher Order Bond Price Perturbation Approximations (May 10, 2010). Available at SSRN: https://ssrn.com/abstract=1598337 or http://dx.doi.org/10.2139/ssrn.1598337

Martin M. Andreasen (Contact Author)

University of Aarhus ( email )

Aarhus
Denmark

CREATES, Aarhus University ( email )

School of Economics and Management
Building 1322, Bartholins Alle 10
DK-8000 Aarhus C
Denmark

HOME PAGE: http://econ.au.dk/research/research-centres/creates/people/junior-fellows/martin-andreasen/

Pawel Zabczyk

CCBS, Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

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