How and why our conventional economic thinking causes global crises (discussion paper)
I believe it's no wonder that our world is in trouble. We currently lack the global systems science needed to understand our world, which is now changing more quickly than we can collect the experience required to cope with upcoming problems. We can also not trust our intuition, since the complex systems we have created behave often in surprising, counter-intuitive ways. Frequently, their properties are not determined by their components, but their interactions. Therefore, a strongly coupled world behaves fundamentally different from a weakly coupled world with independent decision-makers. Strong interactions tend to make the system uncontrollable - they create cascading effects and extreme events.
Guest Editorial: Achilles' heels of current economic theories - The debate
A guest editorial by Dirk Helbing (ETHZ, Switzerland) presenting an ongoing debate on the Achilles' heels of current economic theories.
Inside The Black Box: The Simple Truth About Quantitative Trading
Dynamics of Markets - The New Financial Economics
1 vote
pdf ps other (13 views, 6 downloads, comment!) [show abstract]
We study a phenomenological model for the continuous double auction, equivalent to two independent $M/M/1$ queues. The continuous double auction defines a continuous-time random walk for trade prices. The conditions for ergodicity of the auction are derived and, as a consequence, three possible regimes in the behavior of prices and logarithmic returns are observed. In the ergodic regime, prices are unstable and one can observe an intermittent behavior in the logarithmic returns. On the contrary, non-ergodicity triggers stability of prices, even if two different regimes can be seen.
1 vote
pdf ps other (11 views, 2 downloads, comment!) [show abstract]
We have analyzed the Indices of Industrial Production (Seasonal Adjustment Index) for a long period of 240 months (January 1988 to December 2007) to develop a deeper understanding of the economic shocks. The angular frequencies estimated using the Hilbert transformation, are almost identical for the 16 industrial sectors. Moreover, the partial phase locking was observed for the 16 sectors. These are the direct evidence of the synchronization in the Japanese business cycle. We also showed that the information of the economic shock is carried by the phase time-series. The common shock and individual shocks are separated using phase time-series. The former dominates the economic shock in all of 1992, 1998 and 2001. The obtained results suggest that the business cycle may be described as a dynamics of the coupled limit-cycle oscillators exposed to the common shocks and random individual shocks.
1 vote
pdf ps other (18 views, 13 downloads, comment!) [show abstract]
We present and discuss a stochastic model of financial assets dynamics based on the idea of an inverse renormalization group strategy. With this strategy we construct the multivariate distributions of elementary returns based on the scaling with time of the probability density of their aggregates. In its simplest version the model is the product of an endogenous auto-regressive component and a random rescaling factor embodying exogenous influences. Mathematical properties like increments' stationarity and ergodicity can be proven. Thanks to the relatively low number of parameters, model calibration can be conveniently based on a method of moments, as exemplified in the case of historical data of the S&P500 index. The calibrated model accounts very well for many stylized facts, like volatility clustering, power law decay of the volatility autocorrelation function, and multiscaling with time of the aggregated return distribution. In agreement with empirical evidence in finance, the dynamics is not invariant under time reversal and, with suitable generalizations, skewness of the return distribution and leverage effects can be included. The analytical tractability of the model opens interesting perspectives for applications, for instance in terms of obtaining closed formulas for derivative pricing. Further important features are: The possibility of making contact, in certain limits, with auto-regressive models widely used in finance; The possibility of partially resolving the endogenous and exogenous components of the volatility, with consistent results when applied to historical series.
1 vote
pdf ps other (12 views, 8 downloads, comment!) [show abstract]
This paper sets up a methodology for approximately solving optimal investment problems using duality methods combined with Monte Carlo simulations. In particular, we show how to tackle high dimensional problems in incomplete markets, where traditional methods fail due to the curse of dimensionality.
1 vote
pdf other (10 views, 4 downloads, comment!) [show abstract]
One of the most important features of spatial networks such as transportation networks, power grids, Internet, neural networks, is the existence of a cost associated with the length of links. Such a cost has a profound influence on the global structure of these networks which usually display a hierarchical spatial organization. The link between local constraints and large-scale structure is however not elucidated and we introduce here a generic model for the growth of spatial networks based on the general concept of cost benefit analysis. This model depends essentially on one single scale and produces a family of networks which range from the star-graph to the minimum spanning tree and which are characterised by a continuously varying exponent. We show that spatial hierarchy emerges naturally, with structures composed of various hubs controlling geographically separated service areas, and appears as a large-scale consequence of local cost-benefit considerations. Our model thus provides the first building blocks for a better understanding of the evolution of spatial networks and their properties. We also find that, surprisingly, the average detour is minimal in the intermediate regime, as a result of a large diversity in link lengths. Finally, we estimate the important parameters for various world railway networks and find that --remarkably-- they all fall in this intermediate regime, suggesting that spatial hierarchy is a crucial feature for these systems and probably possesses an important evolutionary advantage.
1 vote
pdf ps other (11 views, 6 downloads, comment!) [show abstract]
We analyze realized volatilities constructed using high-frequency stock data on the Tokyo Stock Exchange. In order to avoid non-trading hours issue in volatility calculations we define two realized volatilities calculated separately in the two trading sessions of the Tokyo Stock Exchange, i.e. morning and afternoon sessions. After calculating the realized volatilities at various sampling frequencies we evaluate the bias from the microstructure noise as a function of sampling frequency. Taking into account of the bias to realized volatility we examine returns standardized by realized volatilities and confirm that price returns on the Tokyo Stock Exchange are described approximately by Gaussian time series with time-varying volatility, i.e. consistent with a mixture of distributions hypothesis.
The stochastic volatility model is one of volatility models which infer latent volatility of asset returns. The Bayesian inference of the stochastic volatility (SV) model is performed by the hybrid Monte Carlo (HMC) algorithm which is superior to other Markov Chain Monte Carlo methods in sampling volatility variables. We perform the HMC simulations of the SV model for two liquid stock returns traded on the Tokyo Stock Exchange and measure the volatilities of those stock returns. Then we calculate the accuracy of the volatility measurement using the realized volatility as a proxy of the true volatility and compare the SV model with the GARCH model which is one of other volatility models. Using the accuracy calculated with the realized volatility we find that empirically the SV model performs better than the GARCH model.
1 vote
ps (50 views, 23 downloads, comment!) [show abstract]
The question on the title came through my mind one day as I keep in one hand a paper in nuclear physics and in the other hand a paper in finance and surprisingly conclude that the same formula appear in both articles*. Phenomena from apparently completely different field of research were solved with the help of same equation. Things are getting even weirder saying that the formula I was talking about is the time-independent Schrodinger equation.