Umeå Economic Studies, Department of Economics, Umeå University
No 564:
Characterizing the degree of stability of non-linear dynamic models
Mikael Bask ()
and Xavier de Luna ()
Abstract: non-linear dynamic models may be characterized and
studied, where the degree of stability is defined by the effects of
exogenous shocks on the evolution of the observed stochastic system. This
type of stability concept is frequently of interest in economics, e.g., in
real business cycle theory. We argue that smooth Lyapunov exponents can be
used to measure the degree of stability of a stochastic dynamic model. It
is emphasized that the stability properties of the model should be
considered when the volatility of the variable modelled is of interest.
When a parametric model is fitted to observed data, an estimator of the
largest smooth Lyapunov exponent is presented which is consistent and
asymptotically normal. The small sample properties of this estimator are
examined in a Monte Carlo study. Finally, we illustrate how the presented
framework can be used to study the degree of stability and the volatility
of an exchange rate.
Keywords: Autoregression; Exchange rates; Exogenous shocks; Lyapunov exponents; Persistence; Time series.; (follow links to similar papers)
JEL-Codes: C13; C22; C50; (follow links to similar papers)
22 pages, November 1, 2001
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