Alternative Specifications of the Error Process in the Stochastic Simulation of Econometric Models.

Abstract

This paper analyzes the stochastic simulation of econometric models using three different methods for specifying the probability distribution of the structural error terms. The impact of these different assumptions on the simulation bias and model variance is explored empirically. Monte Carlo variance reduction techniques are used to distinguish the effects of the different specifications. Copyright 1990 by John Wiley & Sons, Ltd.