An efficient method of computing higher-order bond price perturbation approximations

Working papers set out research in progress by our staff, with the aim of encouraging comments and debate.
Published on 10 March 2011

Working Paper No. 416
By Martin M Andreasen and Pawel Zabczyk

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.

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