Jang, Youngsoo and Lee, Soyoung (2019): A Generalized Endogenous Grid Method for Models with the Option to Default.
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Abstract
We develop an endogenous grid method for models with the option to default in which price schedules are endogenously determined in equilibrium and depend on individuals’ states. The algorithm has noticeable computational benefits in efficiency and accuracy. We obtain these computational benefits by combining Fella’s (2014) identification for non-concave regions with our algorithm that numerically searches for risky borrowing limits. These two procedures identify the region of solution sets to which Carroll’s (2006) endogenous grid method is applicable. To demonstrate the method, we apply our method to Nakajima and Rios-Rull’s(2014) model. In terms of computation time, this method is seven to twenty-seven times faster than the conventional grid search method. Moreover, various types of accuracy tests indicate that our method yields more accurate results than the grid search method.
Item Type: | MPRA Paper |
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Original Title: | A Generalized Endogenous Grid Method for Models with the Option to Default |
Language: | English |
Keywords: | Endogenous grid method, Default, Bankruptcy |
Subjects: | C - Mathematical and Quantitative Methods > C6 - Mathematical Methods ; Programming Models ; Mathematical and Simulation Modeling > C63 - Computational Techniques ; Simulation Modeling |
Item ID: | 95745 |
Depositing User: | Youngsoo Jang |
Date Deposited: | 28 Aug 2019 09:23 |
Last Modified: | 27 Sep 2019 07:28 |
References: | Algan, Y., Allais, O., Den Haan, W. J., Rendahl, P., 2014. Solving and simulating models with heterogeneous agents and aggregate uncertainty. In: Handbook of Computational Economics, Elsevier, vol. 3, pp. 277-324. Arellano, C., 2008. Default risk and income fluctuations in emerging economies. American Economic Review 98, 690-712. Arellano, C., Maliar, L., Maliar, S., Tsyrennikov, V., 2016. Envelope condition method with an application to default risk models. Journal of Economic Dynamics and Control 69, 436-459. Barillas, F., Fernandez-Villaverde, J., 2007. A generalization of the endogenous grid method. Journal of Economic Dynamics and Control 31, 2698-2712. Carroll, C. D., 2006. The method of endogenous gridpoints for solving dynamic stochastic optimization problems. Economics Letters 91, 312-320. Clausen, A., Strub, C., 2019. Reverse calculus and nested optimization. Druedahl, J., Jorgensen, T. H., 2017. A general endogenous grid method for multi-dimensional models with non-convexities and constraints. Journal of Economic Dynamics and Control 74, 87-107. Fella, G., 2014. A generalized endogenous grid method for non-smooth and non-concave problems. Review of Economic Dynamics 17, 329-344. Hatchondo, J. C., Martinez, L., Sapriza, H., 2010. Quantitative properties of sovereign default models: solution methods matter. Review of Economic dynamics 13, 919-933. Hintermaier, T., Koeniger, W., 2010. The method of endogenous gridpoints with occasionally binding constraints among endogenous variables. Journal of Economic Dynamics and Control 34, 2074-2088. Iskhakov, F., Jorgensen, T. H., Rust, J., Schjerning, B., 2017. The endogenous grid method for discrete-continuous dynamic choice models with (or without) taste shocks. Quantitative Economics 8, 317-365. Khan, A., 2016. Aggregate fluctuations in a quantitative overlapping generations economy with unemployment risk. In: 2016 Meeting Papers, Society for Economic Dynamics, no. 1468. Krusell, P., Smith, Jr, A. A., 1998. Income and wealth heterogeneity in the macroeconomy. Journal of Political Economy 106, 867-896. Nakajima, M., Rios-Rull, J.-V., 2014. Credit, bankruptcy, and aggregate fluctuations. Tech. rep., National Bureau of Economic Research. |
URI: | https://mpra.ub.uni-muenchen.de/id/eprint/95745 |
Available Versions of this Item
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A Generalized Endogenous Grid Method for Models with the Option to Default. (deposited 26 Aug 2019 11:22)
- A Generalized Endogenous Grid Method for Models with the Option to Default. (deposited 28 Aug 2019 09:23) [Currently Displayed]