Leitura do Dia - A survey of sequential Monte Carlo methods for economics and finance

A survey of sequential Monte Carlo methods for economics and finance

Drew Creal

University of Chicago, Booth School of Business
October 13, 2009
Abstract
This paper serves as an introduction and survey for economists to the field of sequential Monte Carlo methods which are also known as particle filters. Sequential Monte Carlo methods are simulation based algorithms used to compute the high-dimensional and/or complex integrals that arise regularly in applied work. These methods are becoming increasingly popular in economics and finance; from dynamic stochastic general equilibrium models in macro-economics to option pricing. The objective of this paper is to explain the basics of the methodology, provide references to the literature, and cover some of the theoretical results that justify the methods in practice.

Keywords: state space models; sequential Monte Carlo; particle filter; Markov chain Monte
Carlo; Kalman filter
JEL Classification: C11; C15; C32.