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Investment under Risk with Discrete and Continuous Assets

Author

Listed:
  • Chris Elbers

    (VU University Amsterdam)

  • Jan Willem Gunning

    (VU University Amsterdam)

  • Melinda Vigh

    (VU University Amsterdam)

Abstract

This paper considers a general class of stochastic dynamic choice models with discrete and continuous decision variables. This class contains a variety of models that are useful for modeling intertemporal household decisions under risk. Our examples are drawn from the field of development economics. We formalize this class as a dynamic programming problem, then propose a solution method that relies on value function iteration. Finally, in an example we show how our algorithm can be applied to solve and estimate a dynamic model with discrete and continuous controls.

Suggested Citation

  • Chris Elbers & Jan Willem Gunning & Melinda Vigh, 2009. "Investment under Risk with Discrete and Continuous Assets," Tinbergen Institute Discussion Papers 09-054/2, Tinbergen Institute.
    • Handle: RePEc:tin:wpaper:20090054
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    References listed on IDEAS

    as
    1. Chris Elbers & Jan Willem Gunning & Bill Kinsey, 2007. "Growth and Risk: Methodology and Micro Evidence," The World Bank Economic Review, World Bank, vol. 21(1), pages 1-20.
    2. Rosenzweig, Mark R & Wolpin, Kenneth I, 1993. "Credit Market Constraints, Consumption Smoothing, and the Accumulation of Durable Production Assets in Low-Income Countries: Investment in Bullocks in India," Journal of Political Economy, University of Chicago Press, vol. 101(2), pages 223-244, April.
    3. Marcel Fafchamps & John Pender, "undated". "Precautionary Saving Credit Constraints and Investment: Theory and Evidence from Semi-Arid India," Computing in Economics and Finance 1997 37, Society for Computational Economics.
    4. Dercon, Stefan, 1998. "Wealth, risk and activity choice: cattle in Western Tanzania," Journal of Development Economics, Elsevier, vol. 55(1), pages 1-42, February.
    5. Zimmerman, Frederick J. & Carter, Michael R., 2003. "Asset smoothing, consumption smoothing and the reproduction of inequality under risk and subsistence constraints," Journal of Development Economics, Elsevier, vol. 71(2), pages 233-260, August.
    6. Ariel Pakes, 1991. "Dynamic Structural Models: Problems and Prospects. Mixed Continuous Discrete Controls and Market Interactions," Cowles Foundation Discussion Papers 984, Cowles Foundation for Research in Economics, Yale University.
    7. Kenneth L. Judd, 1998. "Numerical Methods in Economics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262100711, April.
    8. Goffe, William L. & Ferrier, Gary D. & Rogers, John, 1994. "Global optimization of statistical functions with simulated annealing," Journal of Econometrics, Elsevier, vol. 60(1-2), pages 65-99.
    9. Fafchamps, Marcel & Pender, John, 1997. "Precautionary Saving, Credit Constraints, and Irreversible Investment: Theory and Evidence from Semiarid India," Journal of Business & Economic Statistics, American Statistical Association, vol. 15(2), pages 180-194, April.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    value function iteration; mixed continuous/discrete controls; stochastic dynamic choice model;
    All these keywords.

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian; Modern Monetary Theory
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • Q12 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Micro Analysis of Farm Firms, Farm Households, and Farm Input Markets

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