An Efficient Method of Computing Higher-Order Bond Price Perturbation Approximations

38 Pages Posted: 18 Mar 2011  

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: March 15, 2011

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 100 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.

Keywords: Perturbation method, DSGE models, habit model, higher-order approximation

JEL Classification: C63, G12

Suggested Citation

Andreasen, Martin M. and Zabczyk, Pawel, An Efficient Method of Computing Higher-Order Bond Price Perturbation Approximations (March 15, 2011). Bank of England Working Paper No. 416. Available at SSRN: https://ssrn.com/abstract=1786642 or http://dx.doi.org/10.2139/ssrn.1786642

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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