Markov-chain approximations of vector autoregressions: Application of general multivariate-normal integration techniques

Abstract

Discrete Markov chains are helpful for approximating vector autoregressive processes in computational work. We relax G. Tauchen (1986) [Finite state Markov-chain approximations to univariate and vector autoregressions. Economics Letters 20, 177–181] in practice using multivariate-normal integration techniques to allow for arbitrary positive-semidefinite covariance structures. Examples are provided for non-diagonal and singular non-diagonal error covariances.