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approximation.py
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approximation.py
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"""
Collection of functions to approximate a continuous random process by a
discrete Markov chain.
"""
from math import erfc, sqrt
from .core import MarkovChain
from .estimate import fit_discrete_mc
from ..lss import simulate_linear_model
from ..matrix_eqn import solve_discrete_lyapunov
from ..util import check_random_state
import warnings
import numpy as np
import numbers
from numba import njit
def rouwenhorst(n, rho, sigma, mu=0.):
r"""
Takes as inputs n, mu, sigma, rho. It will then construct a markov chain
that estimates an AR(1) process of:
:math:`y_t = \mu + \rho y_{t-1} + \varepsilon_t`
where :math:`\varepsilon_t` is i.i.d. normal of mean 0, std dev of sigma
The Rouwenhorst approximation uses the following recursive defintion
for approximating a distribution:
.. math::
\theta_2 =
\begin{bmatrix}
p & 1 - p \\
1 - q & q \\
\end{bmatrix}
.. math::
\theta_{n+1} =
p
\begin{bmatrix}
\theta_n & 0 \\
0 & 0 \\
\end{bmatrix}
+ (1 - p)
\begin{bmatrix}
0 & \theta_n \\
0 & 0 \\
\end{bmatrix}
+ q
\begin{bmatrix}
0 & 0 \\
\theta_n & 0 \\
\end{bmatrix}
+ (1 - q)
\begin{bmatrix}
0 & 0 \\
0 & \theta_n \\
\end{bmatrix}
where :math:`{p = q = \frac{(1 + \rho)}{2}}`
Parameters
----------
n : int
The number of points to approximate the distribution
rho : float
Persistence parameter in AR(1) process, if you are approximating
an AR(1) process then this is the autocorrelation across periods.
sigma : float
The value of the standard deviation of the :math:`\varepsilon` process
mu : float, optional(default=0.0)
The value :math:`\mu` in the process. Note that the mean of this
AR(1) process, :math:`y`, is simply :math:`\mu/(1 - \rho)`
Returns
-------
mc : MarkovChain
An instance of the MarkovChain class that stores the transition
matrix and state values returned by the discretization method
Notes
-----
UserWarning: The API of `rouwenhorst` was changed from
`rouwenhorst(n, ybar, sigma, rho)` to
`rouwenhorst(n, rho, sigma, mu=0.)` in version 0.6.0.
"""
warnings.warn("The API of rouwenhorst has changed from `rouwenhorst(n, ybar, sigma, rho)`"
" to `rouwenhorst(n, rho, sigma, mu=0.)`. To find more details please visit:"
" https://github.com/QuantEcon/QuantEcon.py/issues/663.",
UserWarning, stacklevel=2)
# Get the standard deviation of y
y_sd = sqrt(sigma**2 / (1 - rho**2))
# Given the moments of our process we can find the right values
# for p, q, psi because there are analytical solutions as shown in
# Gianluca Violante's notes on computational methods
p = (1 + rho) / 2
q = p
psi = y_sd * np.sqrt(n - 1)
# Find the states
ubar = psi
lbar = -ubar
bar = np.linspace(lbar, ubar, n)
def row_build_mat(n, p, q):
"""
This method uses the values of p and q to build the transition
matrix for the rouwenhorst method
"""
if n == 2:
theta = np.array([[p, 1 - p], [1 - q, q]])
elif n > 2:
p1 = np.zeros((n, n))
p2 = np.zeros((n, n))
p3 = np.zeros((n, n))
p4 = np.zeros((n, n))
new_mat = row_build_mat(n - 1, p, q)
p1[:n - 1, :n - 1] = p * new_mat
p2[:n - 1, 1:] = (1 - p) * new_mat
p3[1:, :-1] = (1 - q) * new_mat
p4[1:, 1:] = q * new_mat
theta = p1 + p2 + p3 + p4
theta[1:n - 1, :] = theta[1:n - 1, :] / 2
else:
raise ValueError("The number of states must be positive " +
"and greater than or equal to 2")
return theta
theta = row_build_mat(n, p, q)
bar += mu / (1 - rho)
return MarkovChain(theta, bar)
def tauchen(n, rho, sigma, mu=0., n_std=3):
r"""
Computes a Markov chain associated with a discretized version of
the linear Gaussian AR(1) process
.. math::
y_t = \mu + \rho y_{t-1} + \epsilon_t
using Tauchen's method. Here :math:`{\epsilon_t}` is an i.i.d. Gaussian process
with zero mean.
Parameters
----------
n : scalar(int)
The number of states to use in the approximation
rho : scalar(float)
The autocorrelation coefficient, Persistence parameter in AR(1) process
sigma : scalar(float)
The standard deviation of the random process
mu : scalar(float), optional(default=0.0)
The value :math:`\mu` in the process. Note that the mean of this
AR(1) process, :math:`y`, is simply :math:`\mu/(1 - \rho)`
n_std : scalar(int), optional(default=3)
The number of standard deviations to approximate out to
Returns
-------
mc : MarkovChain
An instance of the MarkovChain class that stores the transition
matrix and state values returned by the discretization method
Notes
-----
UserWarning: The API of `tauchen` was changed from
`tauchen(rho, sigma_u, b=0., m=3, n=7)` to
`tauchen(n, rho, sigma, mu=0., n_std=3)` in version 0.6.0.
"""
if not isinstance(n, numbers.Integral):
warnings.warn(
"The API of tauchen has changed from `tauchen(rho, sigma_u, b=0., m=3, n=7)`"
" to `tauchen(n, rho, sigma, mu=0., n_std=3)`. To find more details please visit:"
" https://github.com/QuantEcon/QuantEcon.py/issues/663.",
UserWarning, stacklevel=2)
# standard deviation of demeaned y_t
std_y = np.sqrt(sigma**2 / (1 - rho**2))
# top of discrete state space for demeaned y_t
x_max = n_std * std_y
# bottom of discrete state space for demeaned y_t
x_min = -x_max
# discretized state space for demeaned y_t
x = np.linspace(x_min, x_max, n)
step = (x_max - x_min) / (n - 1)
half_step = 0.5 * step
P = np.empty((n, n))
# approximate Markov transition matrix for
# demeaned y_t
_fill_tauchen(x, P, n, rho, sigma, half_step)
# shifts the state values by the long run mean of y_t
mu = mu / (1 - rho)
mc = MarkovChain(P, state_values=x+mu)
return mc
@njit
def std_norm_cdf(x):
return 0.5 * erfc(-x / sqrt(2))
@njit
def _fill_tauchen(x, P, n, rho, sigma, half_step):
for i in range(n):
P[i, 0] = std_norm_cdf((x[0] - rho * x[i] + half_step) / sigma)
P[i, n - 1] = 1 - \
std_norm_cdf((x[n - 1] - rho * x[i] - half_step) / sigma)
for j in range(1, n - 1):
z = x[j] - rho * x[i]
P[i, j] = (std_norm_cdf((z + half_step) / sigma) -
std_norm_cdf((z - half_step) / sigma))
def discrete_var(A,
C,
grid_sizes=None,
std_devs=np.sqrt(10),
sim_length=1_000_000,
rv=None,
order='C',
random_state=None):
r"""
Generate an `MarkovChain` instance that discretizes a multivariate
autorregressive process by a simulation of the process.
This function discretizes a VAR(1) process of the form:
.. math::
x_t = A x_{t-1} + C u_t
where :math:`{u_t}` is drawn iid from a distribution with mean 0 and
unit standard deviaiton; and :math:`{C}` is a volatility matrix.
Internally, from this process a sample time series of length
`sim_length` is produced, and with a cartesian grid as specified by
`grid_sizes` and `std_devs` a Markov chain is estimated that fits
the time series, where the states that are never visited under the
simulation are removed.
For a mathematical derivation check *Finite-State Approximation Of
VAR Processes: A Simulation Approach* by Stephanie Schmitt-Grohé and
Martín Uribe, July 11, 2010. In particular, we follow Schmitt-Grohé
and Uribe's method in contructing the grid for approximation.
Parameters
----------
A : array_like(float, ndim=2)
An m x m matrix containing the process' autocorrelation
parameters. Its eigenvalues must have moduli bounded by unity.
C : array_like(float, ndim=2)
An m x r volatility matrix
grid_sizes : array_like(int, ndim=1), optional(default=None)
An m-vector containing the number of grid points in the
discretization of each dimension of x_t. If None, then set to
(10, ..., 10).
std_devs : float, optional(default=np.sqrt(10))
The number of standard deviations the grid should stretch in
each dimension, where standard deviations are measured under the
stationary distribution.
sim_length : int, optional(default=1_000_000)
The length of the simulated time series.
rv : optional(default=None)
Object that represents the disturbance term u_t. If None, then
standard normal distribution from numpy.random is used.
Alternatively, one can pass a "frozen" object of a multivariate
distribution from `scipy.stats`. It must have a zero mean and
unit standard deviation (of dimension m).
order : str, optional(default='C')
('C' or 'F') order in which the states in the cartesian grid are
enumerated.
random_state : int or np.random.RandomState/Generator, optional
Random seed (integer) or np.random.RandomState or Generator
instance to set the initial state of the random number generator
for reproducibility. If None, a randomly initialized RandomState
is used.
Returns
-------
mc : MarkovChain
An instance of the MarkovChain class that stores the transition
matrix and state values returned by the discretization method.
The MarkovChain instance contains:
* `mc.P`: A 2-dim array containing the transition probability
matrix over the discretized states.
* `mc.state_values`: A 2-dim array containing the state vectors
(of dimension m) as rows, which are ordered according to the
`order` option.
Examples
--------
This example discretizes the stochastic process used to calibrate
the economic model included in "Downward Nominal Wage Rigidity,
Currency Pegs, and Involuntary Unemployment" by Stephanie
Schmitt-Grohé and Martín Uribe, Journal of Political Economy 124,
October 2016, 1466-1514.
>>> rng = np.random.default_rng(12345)
>>> A = [[0.7901, -1.3570],
... [-0.0104, 0.8638]]
>>> Omega = [[0.0012346, -0.0000776],
... [-0.0000776, 0.0000401]]
>>> C = scipy.linalg.sqrtm(Omega)
>>> grid_sizes = [21, 11]
>>> mc = discrete_var(A, C, grid_sizes, random_state=rng)
>>> mc.P.shape
(145, 145)
>>> mc.state_values.shape
(145, 2)
>>> mc.state_values[:10] # First 10 states
array([[-0.38556417, 0.02155098],
[-0.38556417, 0.03232648],
[-0.38556417, 0.04310197],
[-0.38556417, 0.05387746],
[-0.34700776, 0.01077549],
[-0.34700776, 0.02155098],
[-0.34700776, 0.03232648],
[-0.34700776, 0.04310197],
[-0.34700776, 0.05387746],
[-0.30845134, 0. ]])
>>> mc.simulate(10, random_state=rng)
array([[ 0.11566925, -0.01077549],
[ 0.11566925, -0.01077549],
[ 0.15422567, 0. ],
[ 0.15422567, 0. ],
[ 0.15422567, -0.01077549],
[ 0.11566925, -0.02155098],
[ 0.11566925, -0.03232648],
[ 0.15422567, -0.03232648],
[ 0.15422567, -0.03232648],
[ 0.19278209, -0.03232648]])
"""
A = np.asarray(A)
C = np.asarray(C)
m, r = C.shape
# Run simulation to compute transition probabilities
random_state = check_random_state(random_state)
if rv is None:
u = random_state.standard_normal(size=(sim_length-1, r))
else:
u = rv.rvs(size=sim_length-1, random_state=random_state)
v = C @ u.T
x0 = np.zeros(m)
X = simulate_linear_model(A, x0, v, ts_length=sim_length)
# Compute stationary variance-covariance matrix of AR process and use
# it to obtain grid bounds.
Sigma = solve_discrete_lyapunov(A, C @ C.T)
sigma_vector = np.sqrt(np.diagonal(Sigma)) # Stationary std dev
upper_bounds = std_devs * sigma_vector
# Build the individual grids along each dimension
if grid_sizes is None:
# Set the size of every grid to default_grid_size
default_grid_size = 10
grid_sizes = np.full(m, default_grid_size)
V = [np.linspace(-upper_bounds[i], upper_bounds[i], grid_sizes[i])
for i in range(m)]
# Fit the Markov chain
mc = fit_discrete_mc(X.T, V, order=order)
return mc