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Correlated Order Three Gaussian Quadratures in Stochastic Simulation Modelling

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  • Artavia, Marco
  • Grethe, Harald
  • Möller, Thordis
  • Zimmermann, Georg

Abstract

A simple approach to generate correlated order three Gaussian quadratures is presented. It is shown how for stochastic simulation modelling purposes the integration over the ncube as suggested in Stroud (1957) is not necessary and thus, a simpler integration formula is given. The theory of inducing a desired covariance matrix is presented and three possibilities to do so are demonstrated. The approach described is implemented in a stochastic version of the European Simulation Model (ESIM) which includes 42 correlated stochastic terms in the yield functions. Model results are presented to validate the proposed approach compared to a Monte Carlo based approach as well as to demonstrate the relevance of stochastic simulation modelling.

Suggested Citation

  • Artavia, Marco & Grethe, Harald & Möller, Thordis & Zimmermann, Georg, 2009. "Correlated Order Three Gaussian Quadratures in Stochastic Simulation Modelling," Conference papers 331853, Purdue University, Center for Global Trade Analysis, Global Trade Analysis Project.
    • Handle: RePEc:ags:pugtwp:331853
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    References listed on IDEAS

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