Continuous vs. Discrete Time: Some Computational Insights

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Abstract

Solving a workhorse incomplete markets model in continuous time is many times faster compared to its discrete time counterpart. This paper dissects the computational discrepancies and identifies the key bottlenecks. The implicit finite difference method – a commonly used tool in continuous time – accounts for a large share of the difference. This method is shown to be a special case of Howard’s improvement algorithm, efficiently implemented by relying on sparse matrix operations. By representing the policy function with a transition matrix it is possible to formulate a similar procedure in discrete time, which effectively eliminates the differences in run-times entirely.
OriginalsprogEngelsk
Artikelnummer104522
TidsskriftJournal of Economic Dynamics and Control
Vol/bind144
Antal sider16
ISSN0165-1889
DOI
StatusUdgivet - nov. 2022

Emneord

  • Implicit method
  • Howard's improvement algorithm
  • Computation

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