Stochastic Difference Equation

Definition: A stochastic difference equation is a linear difference equation with random forcing variables on the right hand side. Here is a stochastic difference equation in k:

k_t+1 + k_t = w_t

where the k's and w's are scalars, and time t goes from 0 to infinity. The w's were exogenous forcing variables. Or:

Ak_t+1 + Bk_t + Ck_t-1 = Dw_t + e_t

where the k's are vectors, the w's and e's are exogenous vectors, and A, B, C, and D are constant matrices.

(Econterms)

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